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American summers, known for baseball games, roasted marshmallows and county fairs, have acquired new traditions: pools missing lifeguards, camps in need of counsellors and restaurants desperate for waiters. These shortages matter for more than just the businesses concerned. Over a year into the Federal Reserve’s fight against inflation, the state of America’s labour market has taken on extraordinary importance. Its health is a crucial indicator of whether the battle is being won or lost.

Initially the covid-19 pandemic was to blame for many of the workforce gaps, since people were less inclined to venture out for employment. Now, as recent data releases make clear, the economy itself is the source of the strains. Consider a wide range of measures. All point to a slight softening in the labour market over the past year. Yet all are still, to a remarkable degree, resilient by historical standards.

For every unemployed person in America, there are 1.6 jobs available, a ratio that is down a tad since mid-2022, but well in excess of the pre-pandemic norm. Since February 2020—before covid hit America—the economy has added nearly 4m jobs, putting employment above its long-term trend line. There do not appear to be many workers left on the sidelines: some 84% of prime-age workers (aged between 25 and 54) now participate in the labour force, the most since 2002 and just a percentage point off an all-time high.

From the perspective of workers, such vigour is welcome. Wage growth has been especially fast for service-sector jobs that require less education, such as construction. That, in turn, has helped to narrow some of the income inequality which bedevils America. Less well-off parts of the population tend to benefit disproportionately from a tight labour market. The unemployment rate for black Americans hit 4.7% in April, a record low.

Will these gains survive when labour shortages feed through to prices? Hourly earnings in June rose at an annualised pace of 4.4%, consistent with an inflation rate roughly twice the Federal Reserve’s target of 2%. Alternative measures suggest upward pressure may be even greater. A tracker by the Fed’s Atlanta branch points to annualised wage growth of around 6% this year.

The continued labour-market strength all but guarantees the Fed will resume lifting interest rates at its meeting in late July, having refrained from doing so in June. Markets now assign a 92% probability to a quarter-point rate rise; just a month ago it was seen as a coin-flip. In March, when a handful of lenders including Silicon Valley Bank collapsed, many feared the financial turmoil would ripple through the economy. But in a speech on July 6th, Lorie Logan, head of the Fed’s Dallas branch, argued that a stronger-than-expected employment backdrop called for more restrictive policy. “Lay-offs remain low,” she said. “There is no indication of an abrupt deterioration in labour-market conditions.”

Optimists hope that the labour market can carry on much as it has, cooling down but avoiding a sharp rise in joblessness. They point to several indicators. There were, for example, about 9.8m open jobs in May, down by 1.6m compared with a year earlier. In an ideal scenario employers would cancel help-wanted ads but not push workers onto the dole. This kind of reduction in staffing demand could, in theory, lead to a gradual slowdown in wage rises without reversing the gains of the past few years. To some extent, that is what is happening. Although still rapid, the growth in hourly earnings is a percentage point lower than a year ago.

The pessimistic retort is that the cool-down has a way to go, and the economy does not move in tidy increments. The Fed has raised interest rates aggressively over the past year, and some of the impact is yet to be felt. At the same time, so long as the labour market remains tight and inflation stubbornly high, the central bank has little choice but to add to that tightening. Not much has broken so far. But the stresses are building. ■