Compensation and wages increased 0.6 percent in July, with disposable income rising 0.5 percent. However, job creation has slowed sharply. Employment gains averaged just 35,000 per month over the past three months, compared with 123,000 during the same period last year. Adding to these concerns, consumer sentiment weakened in August. The Conference Board reported last Tuesday that its consumer confidence index slipped to 97.4 from a revised 98.7 in July, reflecting growing pessimism about job availability and future income. Notably, assessments of current job prospects declined for the eighth straight month, while optimism about earnings also faded. This divergence, strong spending in the present but weaker expectations for the future, underscores the uncertainty confronting households and policymakers alike. The July PCE report confirmed that inflation continues to exceed the Fedʼs target. Headline inflation rose at a 2.9 percent pace over the past six months, while core inflation advanced at a 3.1 percent rate. Tariff-related pressures are expected to continue feeding through to prices later this year.
A Lower Breakeven Employment Growth Rate Traditionally, economists say that any job growth below 50,000 is a sign of economic weakness, while any growth above 100,000 is a sign of resilience. However, new estimates from the St. Louis Fed, published on Thursday, August 28th, suggests these benchmarks are too high given recent demographic shifts. The Federal Reserve Bank of St. Louis's updated estimates show that, with much lower immigration expected in 2025, the breakeven employment growth rate has likely fallen to between 32,000 and 82,000 jobs per month. This means the labour market now requires far fewer new jobs to keep the unemployment rate stable. Recent data are consistent with this adjustment. Between May and July, job growth averaged just 35,000 per month, yet the unemployment rate held near 4.2 percent. This outcome supports the view that even modest payroll gains can be sufficient to maintain stability.
Implications for September Policy The Federal Reserve has kept its benchmark rate in the 4.25 to 4.5 percent range since December. Model-based estimates, using standard policy rules such as those published by the Cleveland Fed, suggest the appropriate federal funds rate for mid-2025 lies between 4.1 and 4.7 percent. Given this range, holding the current rate in September appears justifiable. However, the lower breakeven job growth figures alter the balance of risks.