Hot N Cold: Why US jobs market resembles a Katy Perry song

George Brown, Economist at Schroders

Conflicting data make it difficult to reach a firm conclusion about the US job market. For every indicator that points to a deterioration, another suggests the exact opposite. But on balance, the direction of travel seems to be one of softening labour demand, albeit from elevated levels.

You're hot then you're cold
You're yes then you're no
You're in then you're out
You're up then you're down

Pop star Katy Perry might have been singing about an indecisive lover in her 2008 hit single, but Hot n Cold could just as easily be about this year’s conflicting US labour market data. While several indicators have pointed to a deterioration, an equal number have suggested the exact opposite. Further adding to the confusion has been sharp revisions to some series, which have occasionally flipped the narrative.

This presents a major headache for the Federal Reserve (Fed). Its dual mandate of maximum employment and stable prices means the labour market is perhaps the single most important consideration. And so this year’s mixed data raises the risk of a policy error by the Fed, either by neglecting to raise rates enough or alternatively by overtightening.

Take May’s jobs report. While some 339,000 workers were hired over the month, the unemployment rate climbed 0.3 percentage points to 3.7%, even as the participation rate remained at 62.6%. Divergences between the two do occur from time to time, but very rarely to this extent. So why was there such a dichotomy between them?

For one, two separate surveys are used to calculate the jobs and unemployment figures. The latter is derived from the survey sent to households, which is more representative than the payrolls survey filled out by non-agricultural employers. For instance, the household survey captures those who are self-employed. Of this cohort, the number of those that are unincorporated (i.e. working for themselves in a non-corporate entity) fell by a sharp 412,000 in May.

While this may appear alarming, context is important. An outsized number of Americans started their own businesses over the pandemic. Many of these were women, which may be linked to the increased burden of at-home childcare during lockdown. And so, now that restrictions have eased, it is unsurprising to see a correction back to pre-pandemic levels and trends.

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