Blog

Something is just beginning to happen. It’s momentous, but like a lot of big things, it won’t appear significant right away, unless you know what to look for.

I remember March 17, 2022, very well. I came home and said to my spouse, “It’s started.” That was the day the federal reserve raised the federal funds rate by 0.25%, up to 0.5%. Not a big deal it seemed at the time, but it was the first of 11 rate hikes, up to today’s 5.5%, in an effort to tame inflation and slow the job market.

ISM index projects growth

So, what recently happened? The Institute for Supply Management’s (ISM) Purchasing Managers’ Index, something we follow very closely, came in at 50.3% in March. This reading above 50, which indicates growth, follows 16 consecutive months of contraction.

ISM’s Chair Timothy R. Fiore noted, “Demand remains at the early stages of recovery, with clear signs of improving conditions. Production execution surged compared to January and February, as panelists’ companies re-enter expansion.”

Taken by itself, the ISM numbers would be cause for optimism, but that’s about all, and certainly not enough to warrant a bold headline like, “uh-oh.” But just days later the US labor market surprised economists — once again — with its strength, adding more than 300,000 jobs in March.

Fed’s rate hikes produce unexpected results

While all the Fed’s rate hikes have slowed inflation, they have barely touched the labor markets. The fed thought the unemployment rate would go to 5% or a bit higher, but it has remained under 4% for 26 consecutive months.

As Norbert Sparrow details in his recent article, the expected growth in the manufacturing sector will generate up to 3.8 million new jobs over the next decade. Given that we begin that period with an already robust labor market, the conditions are forming for a return to the situation in 2022, when there were two jobs open for each available unemployed worker.

Hence, as Sparrow concludes, half of those 3.8 million jobs may go unfilled. Uh-oh.