Historically strong job growth is coming in the months ahead, along with continued labor shortages and wage increases, according to The Conference Board Employment Trends Index. That could prompt changes in monetary policy from the Federal Reserve.
The index, which aggregates eight labor market-related indicators to show underlying trends in employment conditions, rose in May to 107.35 from a revised 104.31 in April and 102.65 in March, and is now up 39.4% from the year-ago period, The Conference Board said on Monday. All eight market-related indicators rose. April was revised down from 105.44 originally and March up from 102.44. The rate of increase in the past three months (8.7%) outpaced any other three-month period before the pandemic.
That is good news, especially after the jobs miss last week—the Bureau of Labor Statistics reported on Friday that the economy added a seasonally adjusted 559,000 nonfarm jobs, missing consensus estimates for 663,500, according to Moody’s Analytics. Economists offered up many reasons for the shortfall, including child care issues, generous unemployment benefits, and ongoing fear of COVID-19, but most of them believed pressure on the job market will relax in coming months as summer camps and schools reopen and unemployment benefits expire. In the meantime, though, expect labor shortages and, along with that, wage growth.
“Past index data had signaled growing labor shortages, but the most recent data strongly reinforces this trend,” said Gad Levanon, head of The Conference Board Labor Markets Institute, in a release. “Job shortages are likely to be more acute in those states that opened first, less in those that still have restrictions. The labor shortages are causing wage growth to surge. Average hourly earnings in the past two months rose by 7.4 percent (annual rate), which is two to three times the typical growth rate in recent decades.”
Even though Levanon predicted labor shortages would ease towards the end of the year, he noted that “if the current rate of wage growth continues for several more months,” it could put a wrench in the Fed’s forecast that inflation will be subdued enough to keep monetary policy unchanged.
At the end of April, Fed Chairman Jerome Powell said in a press conference after the Federal Open Market Committee (FOMC) meeting that it was not yet time to talk about tapering bond purchases, which usually comes before an interest rate hike. He said there was more work to be done toward achieving the Fed’s “broad-based and inclusive” maximum employment goal and that he expected price increases to be “transitory.”
The FOMC meets again on June 15 and 16 and will issue its quarterly summary of economic projections. Market watchers will be looking for any signs the Fed is closer to its goals and prepared to change its stance on monetary policy anytime soon.