Economic Monitor – Weekly Commentary
by Eugenio Alemán

Employment and inflation: not supportive of rate cuts

June 5, 2026

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Labor market fundamentals have improved meaningfully from last year’s near standstill while inflation has moved higher, driven in part by the Iran conflict and the resulting increase in petroleum and gasoline prices. As a result, Federal Reserve (Fed) officials are likely becoming more concerned about the risk of broader inflation pressures, a theme highlighted in this week’s ISM Manufacturing and Services PMI releases.

In addition, the administration’s plan to impose a new round of tariffs on 60 countries could further complicate the outlook for lower rates, as it may add to inflation pressures.

Job growth continues to reinforce this shift. Nonfarm payrolls have risen by an average of 113,800 per month so far this year, a sharp improvement from just 10,000 per month in 2025. Under normal circumstances, this pace of job creation would be expected to push the unemployment rate meaningfully lower, especially given recent research suggesting that the breakeven level of employment growth needed to keep the unemployment rate steady has declined significantly.

Some of this research, including one from the Fed, indicates that “Labor force growth has slowed significantly in the past two years and could be near-zero this year.”

The implications of this are several: “(1) Breakeven employment growth would also be near-zero, such that, if the unemployment rate is relatively constant, then negative job growth would be almost as likely as positive job growth in any given month. (2) Any growth in potential GDP will need to come entirely from labor productivity growth.” ¹ Other estimates place breakeven job growth in a range of 20,000 to 60,000 per month.

However, despite job growth exceeding these levels, the unemployment rate has remained largely unchanged. This suggests that underlying labor supply dynamics may be shifting. One possibility is that the labor force is still growing at a modest pace, potentially supported by adjustments to immigration policy that are helping ease labor shortages in certain sectors. If so, stronger employment gains could be absorbed without a reduction in the unemployment rate.

Another possibility is that higher participation is bringing more workers back into the labor force, offsetting job gains. However, this does not appear to be the case, as the labor force participation rate has been declining since January.

Bottom line

Taking all of this into account, we are removing the final rate cut we previously expected later this year. With inflation moving higher and the labor market improving considerably, the Federal Reserve is unlikely to ease policy in 2026.

We continue to expect one rate cut next year, reflecting our view that economic growth and fiscal support will slow, and that inflation will gradually moderate assuming no additional shock.

¹FEDS Notes, “Labor force growth, breakeven employment, and potential GDP growth,” by Seth Murray and Ivan Vidangos, April 02, 2026. Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/econres/notes/feds-notes/labor-force-growth-breakeven-employment-and-potential-gdp-growth-20260402.html

---

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.

US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA HPI is a broad measure of the movement of single-family house prices. The FHFA HPI is a weighted, repeat- sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

The ISM Manufacturing Index: The GDP Now Institute of Supply Management (ISM) Manufacturing Measures the health of the manufacturing sector by surveying purchasing managers at manufacturing firms. The survey asks about current business conditions and expectations for the future, including new orders, inventories, employment, and deliveries.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.

Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.

Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

Source: FactSet, data as of 10/17/2025