Slowing US jobs market threatens central bankers in Jackson Hole

Just a short drive from the plant that once housed industrial giant Bethlehem Steel before it went bankrupt in 2001, Lehigh Valley Plastics produces tens of thousands of parts each week for machines across the United States.

Housed in a 57,000-square-foot warehouse, it makes crane pulleys, wear pads for truck manufacturers and seals used by the oil industry. Its customers also include medical equipment makers and food companies.

Lehigh Valley, Pennsylvania, a logistics and manufacturing hub just a few days' drive from a third of America's consumers, has become a beacon of the American economy, a hive of economic activity that has defied economists who feared a recession after more than a year of tight interest rates.

And the region will be among those on the Federal Reserve's radar in the coming weeks as the central bank weighs whether to cut borrowing costs — a decision that will have implications for jobs in the Lehigh Valley, global markets and even how Americans view their economy when they elect a new president in November.

The Lehigh Valley hive is now showing signs of cooling.

Lehigh Valley Plastics has grown rapidly after the pandemic, rehiring workers and increasing its overall workforce to nearly 90. To attract qualified machinists, the company increased starting wages by 15%.

Lehigh Valley Plastics' president says the company is definitely experiencing a [downwards] change in demand Lehigh Valley Plastics

But after filling six additional positions, company President Shelly McWilliams is likely to pause hiring.

We are definitely seeing a shift in demand. It will definitely decline, she said, warning of a general slowdown through the end of the year as customers have become more conservative after a period of excessive buying in the wake of the pandemic.

Across the Lehigh River in Allentown, Russell Breuer, founder and CEO of pet food company Spot & Tango, has noticed changes among workers.

The e-commerce site is booming, with customers spending an average of $150 a month to feed their dogs. But the number of applications has doubled or even tripled for some positions, he added. More employees are also staying with the company.

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Neither McWilliams nor Breuer are yet considering layoffs, but the outlook is bleak.

Hiring and finding staff is not the priority it once was, said Tony Iannelli, who heads the Greater Lehigh Valley Chamber of Commerce. Now, there are questions about where the economy is going.

That caution will be at the forefront of policymakers from around the world who will gather this week in Jackson Hole, Wyoming, for the Kansas City Fed's annual conference. Fed Chairman Jay Powell will speak on Friday.

Downtown Allentown Colby Smith/FTSpot & Allentown Local Tangos Colby Smith/FT

Panic over rising prices has eased as the Fed aims to hit a 2% inflation target. But financial markets and central bankers are increasingly worried about the health of the world's largest economy after more than a year of interest rates at 5.3%, their highest level since 2001.

The Fed is expected to start cutting rates in September, but it rarely succeeds in cooling an overheating economy without triggering a recession. Economists are increasingly concerned about the impact on jobs.

Even if the Fed thought the 5.3% rate was restrictive in July 2023, it is much, much more restrictive today. [that inflation has fallen]and the economy is certainly in for a shock, said Charles Evans, a former president of the Chicago Fed.

The unemployment rate has climbed to 4.3%, but it remains low by historical standards. So has the number of Americans filing for weekly unemployment benefits. And consumers continue to spend, another sign of resilience that prompted Goldman Sachs to lower its recession risk to 20% last week.

At 3.6 percent, the Lehigh Valley's unemployment rate hardly signals an imminent recession, either.

Job growth in the region has been strongest in leisure, hospitality and construction, but is slowing in trade and manufacturing. Job openings are slightly lower than last year. But small businesses don't feel they're on the brink, even if they're more cautious about the future.

People continue to flock to see double-headers at Shankweilers Drive-In Theater, the world’s oldest movie theater, in Orefield, 20 minutes from Allentown. But co-owner Lauren McChesney isn’t sure she’ll need to hire more workers to replace her part-time staff when they leave after a successful summer.

The co-owner of Shankweilers Drive-In Theater isn't sure if she'll need to hire more workers when her part-time staff leaves at the end of the summer. Shankweilers Drive-In Theater in Orefield, Pennsylvania

Bethlehem's Flying Egg restaurant still has a busy peak hour on weekends, but Ashlynn Miller, who has worked there for three years, said that hour has decreased.

Every server, manager and cook I know says the same thing, which is that it really doesn't seem like restaurants are as busy right now, she said.

This type of slowdown is the outcome the Fed was looking for when it began raising interest rates in 2022.

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Policymakers wanted higher borrowing costs to moderate demand, dampening price increases caused in part by pandemic-related supply bottlenecks. With those bottlenecks removed, inflation fell below 3% for the first time since March 2021, according to the latest consumer price index report. It peaked at 9.1% in mid-2022.

The fact that this development occurred without unemployment rising more rapidly surprised economists. History is littered with rare soft landings.

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But the pandemic has changed the hiring landscape for many companies, said Karianne Gelinas of the Lehigh Valley Economic Development Corporation. Having been hampered by severe labor shortages as the economy reopened, companies are cautious about layoffs, opting instead to reduce open positions.

That fear has motivated Liz Torres, operations manager at manufacturer Royal Industries, to keep a small team of workers on the payroll year-round, even though we know it's going to be slow.

We want to keep them for the high season, she added.

This has upended some traditional economic indicators. The recent rise in the unemployment rate has triggered the Sahm rule, which marks the beginning of a recession when the three-month average rises by at least half a percentage point above its lowest level in the previous 12 months.

The economist who wrote the rule said that relationship might not hold this time.

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Why? On the one hand, many economists attribute the rise in unemployment to the expanding labor pool due to increased immigration.

This surge in immigration could mean that labor market indicators are not following their usual trends, said Karen Dynan, a former Fed official now at Harvard University. I don’t see any signs that we should panic at this point, but of course we have to be aware of the uncertainty.

The Fed isn't panicking either, but economists will be watching closely to see how Powell discusses the economic outlook in his speech on Friday.

Most market participants think the Fed will cut rates by a quarter point in September, but a minority think it could be half a point, especially if the next jobs report is as weak as last month's. Borrowing costs are expected to fall by nearly a percentage point this year.

Mary Daly, president of the San Francisco Fed and a voting member of the Federal Open Market Committee, has rejected the need for aggressive tapering. Gradualism is not weak, slow or overdue, it is simply prudent, she told the Financial Times this week.

Officials made clear they would take action if there was an unexpected weakening in the labor market, a point echoed by Atlanta Fed FOMC member Raphael Bostic.

Former Fed official John Roberts says Powell should give more leeway in the pace of rate cuts. A half-point cut doesn't necessarily mean the central bank believes a recession is imminent, but that it wants to prevent one.

For the first time in some time, Powell may be more optimistic now that inflation is under control, said Torsten Slok, chief economist at Apollo Global Management.

The incredible thing is that the Fed has managed to do all this without causing an economic collapse. That gives it a victory lap.

Additional reporting by Oliver Roeder in New York

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