June 2023 National Economic Outlook

Executive Summary

Employment growth was far stronger than expected in May, according to a survey of employers from the Bureau of Labor Statistics, with the economy adding a net 339,000 jobs over the month. This is well above the consensus expectation of 180,000. In addition, there were large upward revisions to job growth in both March and April of a combined 91,000. Over the last three months the economy has added more than 280,000 jobs on average, well above the economy’s long-run potential. 

This is unwelcome news for the Federal Reserve, which would like to see job growth slow to a more sustainable monthly pace of around 125,000. The unemployment rate jumped 0.3 percentage point to 3.7%, the highest the rate has been since October 2022. This was also the biggest one-month increase in the unemployment rate since it soared in April 2020 at the beginning of the pandemic. The 3.4% rate in April 2023 matched the lowest unemployment rate since 1969.

The Federal Open Market Committee kept the federal funds rate unchanged in a range between 5.00% and 5.25% on June 14, as widely expected. This is the first FOMC meeting where the committee has not raised the fed funds rate since January 26, 2022, when the rate was in a range between 0.00% and 0.25% coming out of the pandemic. This tightening in monetary policy since the spring of 2022 has weighed on economic growth, although the economy continues to expand in mid-2023. 

While the FOMC kept the fed funds rate unchanged in June, it is likely to raise it again in the near term given the tight labor market and inflation that is running far too hot. FOMC participants’ own projections, as well as speeches from Fed officials including Chair Powell, point to further increases in the fed funds rate this year.

Inflation is slowing but remains elevated. The overall consumer price index was up 4.1% in May from one year earlier. This was down from 4.9% in April and a peak of almost 9% in mid-2022. The core CPI, which excludes volatile food and energy prices and is a better measure of underlying inflation trends, was up 5.3% year-over-year in May. This was down from 5.5% in May and 6.6% in September 2022. Core inflation is easing only gradually. 

The central bank’s preferred inflation gauge is a different measure, the personal consumption expenditures price index, which tends to run a bit below the CPI, but it is also well above the FOMC’s 2% objective. Core services, including housing services, is the primary driver of high inflation in 2023; this is different from last year, when goods inflation was the dominant factor.

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