It is not easy being the Fed, especially now. Committee members will be tasked with dissecting critical economic reports released just days ahead of the June FOMC meeting. Not only do they have to decide if the current monetary policy is still correct, but committee members will also be asked to predict anonymously where inflation, consumption, economic growth, the unemployment rate and interest rates will be over the next three years.  The collective predictions are what we refer to as the Dot Plot.

Why is this meeting so challenging?  The May data on the labor market, along with manufacturing and service industry activity, has been conflicting. First, the labor market. The private sector report on job creation, published by ADP Data Research and from actual payroll data, showed job gains grew at the slowest pace since January. Manufacturing in particular cut 20,000 jobs. Professional and business services lost the most jobs in a year. Combine this with the smallest number of job openings, 8.06 million, since February 2021, and the picture is clear – the labor market is cooling. Yet, the more official monthly job report from the Bureau of Labor Statistics told the world that 272,000 jobs were created in May, almost 100,000 more than were created in April and the second highest this year. On top of that, both monthly and annual average hourly earnings increased more than expected, a sign of reemerging inflation.  So, is the labor market cooling or strengthening? According to Nela Richardson, chief economist at ADP, “the labor market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers.”

The second set of conflicting reports of economic activity came from the Institute of Supply Management’s measures of manufacturing and services activity in May. The manufacturing index fell to the weakest level in three months, 48.7, caused by weakening demand for goods. New orders declined the most in almost two years. U.S. manufacturing is struggling to gain momentum due to softer consumer spending, high borrowing costs and limited business investment in equipment. On the other hand, the gauge of services activity was the opposite – the index rose more than expected to 53.8, a level consistent with growth. There were strong gains in production and new orders, suggesting a rebound from weak first quarter growth. To top it off, the measure of prices paid for services for inputs cooled.

Where does this leave the Fed just days ahead of a pivotal meeting? Likely in the same place it has been for months – patiently waiting for clear signs before making any moves. It is difficult to know from reports how the labor market is faring, but "boots on the ground" data suggests it may be weaker than the government report states. Inflation is still under pressure, and while it may not be rising at the pace of 2022, it is not slowing at the pace of 2023 either. Higher for longer may be needed to bring the economy into balance.