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Economic & Housing Weekly Note

Fed Remains Patient on Tapering Timeline as Labor Market Tightness Persists

July 9, 2021

Key Takeaways:

  • The minutes from the Federal Open Market Committee’s (FOMC) June 15-16 meeting showed that the FOMC’s standard of “substantial further progress” regarding the economic recovery had not yet been met, as participants "generally saw supply disruptions and labor shortages as constraining the expansion of economic activity this year." Participants noted that inflation had risen more than they had anticipated, driven by supply shortages, with several participants anticipating that such shortages would "put upward pressure on prices into next year." Given this, various participants "expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated," with several officials supporting the reduction in the pace of MBS purchases more quickly than other asset purchases.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings increased by 16,000 to 9.2 million in May, just above the previous record set in April, according to the Bureau of Labor Statistics. Notable movers were construction job openings, which fell 14.8 percent, and education & health care services, which increased 7.7 percent. Job openings in the leisure & hospitality sector were essentially unchanged, rising just 10,000, though remain at the highest level in series history. Hiring across all industries declined about 85,000 to 5.9 million, with a notable decline in construction hiring, while separations fell substantially from 5.8 million to 5.3 million as the number of quits fell sharply, though total quits remain historically high. Layoffs and discharges were the lowest on record at just under 1.4 million.
  • The ISM Service Index, a gauge of service sector activity, declined 3.9 points to 60.1 in June, falling from its record high in May but still indicating a strong expansion (any reading above 50 indicates expansion). The business activity index dropped 5.8 points to 60.4, while the employment index fell 6.0 points to 49.3, the largest decline since April 2020. The prices index remained elevated, while the subindex for the backlog of orders hit a record high of 65.8.
  • Consumer (non-mortgage) credit outstanding increased $35.3 billion in May, the largest increase since December 2010, according to the Federal Reserve Board. Both revolving (largely credit cards) and non-revolving (largely student and auto loans) credit rose substantially, rising $9.2 billion and $26.1 billion, respectively.
Forecast Impact:

The sharp decline in the ISM Service Employment Index, to a level slightly below the expansionary threshold of 50, does not reflect a softening in firms’ desires to hire more workers. Record-high job openings of 9.2 million in May point to high levels of unmet labor demand and suggest that softness in the ISM measure was driven by the difficulties faced by employers in filling positions. Our near-term real GDP and employment forecasts rest on an expectation that most of this abnormal labor market tightness will diminish over the remainder of the year. We expect more workers to return as expanded unemployment benefits expire, schools and office work reopen further, and vaccinations continue to ease COVID concerns. Uncertainty remains, though, over how many workers have decided upon early retirement or will not otherwise be willing to return to their prior industries. For now, however, this week’s labor market data releases did not lead to a change in our outlook.

Current labor market tightness driving solid wage growth will likely help to support consumer spending in the near term, replacing lost income from waning unemployment benefits; however, this also poses upside risks for inflation. Additionally, the large increase in revolving consumer credit suggests that consumers are becoming more confident, supporting our view of continued strong consumer spending and therefore labor demand over the coming months. Still, with total employment roughly 7 million below the pre-COVID peak, we do not expect the Fed to change its policy rate anytime soon. However, we believe growing inflationary pressure could lead the Fed to move more swiftly on tapering its asset purchases than we previously expected.


Ricky Goyette, Eric Brescia, and Nathaniel Drake
Economic and Strategic Research Group
July 9, 2021

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