Why the latest jobs report means everything and nothing

It’s not news that the Federal Reserve will continue its singular focus on fighting inflation, most recently raising the federal funds rate by 75 basis points to a range of 3 to 3.25 percent. Fed Chairman Jerome Powell has also indicated that the Federal Open Market Committee is not done, projecting that the Fed may raise rates another 125 basis points to 4.4 percent by the end of the year.

Job growth is always an indicator of what the Fed might do next. Over the past two months, job growth fell to its slowest pace since January 2021, granting the Fed a sigh of relief over a labor market that is still strong but no longer white hot. Coincidentally, Friday’s report also showed that wage growth over the past two months fell to the lowest level in 18 months. This is evidence of easing tightness in the labor market and should alleviate some of the Fed’s concerns about inflationary pressures.

But at the end of the day, this means nothing to consumers — but everything to Powell, and here’s why:

How the Fed reacts to last week’s jobs report means nothing to American families and small businesses who have continued to feel the pressures of inflation for months and months. I recently heard about a group of small business owners who regularly make small-dollar bets on whether the Fed will raise rates and by how much, as if managing the economy is a game. As someone who represents credit unions and their 133 million members across the country at the National Association of Federally Insured Credit Unions (NAFCU), it is no shock to me that Americans are making light of the Fed’s next move. They’ve already chosen to prepare for a recession — some believe we’re already there — and therefore are spending and saving differently and have been for quite some time amid such an uncertain economy.

In a poll conducted at a NAFCU conference just three weeks ago, nearly 40 percent of our member credit union chief financial officers in attendance stated that they believe there is a 60-80 percent chance we will be in a recession by the middle of 2023. These are the men and women who manage the books of credit unions and very much understand the financial habits and stability, or instability, of their members: everyday Americans and Main Street small businesses.

We also can’t overlook the fact that the housing market is already in a recession. Home sales are down 20 percent from a year ago, and many homeowners refuse to list properties because their mortgages are so far below market rates. Inventory is about half of a normal market, which is preventing a collapse in home values but exacerbating affordability issues.

While the Consumer Sentiment Index is higher than it has been most of the year, the Fed’s next moves won’t change consumer sentiment on how they deal with, or are already dealing with, a recession right now. Nor will it change the way they vote in November.

And this is why Friday’s jobs report means everything for Chairman Powell.

With political pressures expanding and the midterm elections just four weeks away, Powell faces a tough road ahead. The Fed is taking direct aim at the labor market with its rate hikes and anticipates unemployment rising from 3.7 percent currently to 4.4 percent next year. While Powell has said he and his colleagues must ignore the political calendar, any rate hike — weak or aggressive, is likely too late to protect consumers.

Recently, Fed Vice Chair Lael Brainard suggested she wants to slow down rate hikes and find a rate that will gradually bring inflation back to the Fed’s target of two percent. Brainard noted that “it will take time for the full effect of tighter financial conditions to work through different sectors and to bring down inflation,” alluding to a potential slowdown of rate hikes to allow the Fed’s previous tightening to take effect first.

It’s critical to note that on average it takes 12-18 months for rate increases to affect the economy. And government debt service is getting expensive for local, state and federal governments. With the expectation that the combination of trade and waning fiscal stimulus will continue to weigh on GDP for the remainder of the year, it’s safe to say that we will see a recession in the first half of next year. 

But it’s clear that Americans are trying their best to prepare for this scenario, and credit unions will manage accordingly, just as they have throughout the recessions of our past. 

So, while the latest jobs report means a lot for Chairman Powell’s reputation, it means little for everyday American consumers who are already anxiously anticipating a rough road ahead. What will Powell do to fix this mess?

B. Dan Berger is president and chief executive officer of the National Association of Federally-Insured Credit Unions (NAFCU), an industry association that provides credit unions with federal advocacy, education and compliance assistance.