The Federal Reserve has two mandates assigned by Congress: maximum employment and price stability. The first is often discussed through something economists call the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. We economists are not always the most creative or exciting bunch.
Most economists would probably put the current NAIRU somewhere near the Fed's median longer-run unemployment projections of roughly 4.0% to 4.3%. This is the unemployment rate Fed officials expect the economy to converge toward under appropriate monetary policy and in the absence of major shocks. Today, the unemployment rate is 4.1%.
Figure 1. U.S. Unemployment Rate (%)
Sources: Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of July 2026
In other words, there is not much evidence yet that the economy has moved materially beyond what the Fed would consider maximum employment.
That makes July's employment report look less alarming than the headline would suggest. Yes, nonfarm payrolls fell by 23,000, but the decline was heavily influenced by a 50,000 drop in local government employment and a 40,000 decline in leisure and hospitality.
At least part of the government decline appears related to the usual difficulty of seasonally adjusting public-school employment during the summer, when teachers, bus drivers and other school employees move on and off payrolls. The decline in leisure and hospitality could also have been influenced by the winding down of the World Cup in select cities, although two consecutive months of losses makes that harder to pin down.
Figure 2. Monthly Change in Local Government Employment (Thous.)
Sources: Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of July 2026.
Regardless of the causes, we suspect the Federal Reserve may treat the report as "no real news" for now. Private payrolls still increased by roughly 30,000 during the month, while the unemployment rate remains around the Fed's longer-run estimate of full employment. For now, the labor-market side of the mandate does not appear to be flashing red.
We also found it interesting that the employment data diverged quite a bit from what small businesses reported during July. According to the National Federation of Independent Business, the percentage of small businesses planning to increase hiring over the next three months jumped to 20%, its highest reading since 2022. Historically, readings at these levels have been much more consistent with continued job creation than job loss.
Using monthly data back to 1980, when NFIB hiring plans have been at 20% or higher, 93% of observations were followed by no negative nonfarm payroll print over the next three months. For private payrolls, the figure rises to nearly 95% when excluding the unusual COVID period. While another negative payroll print is certainly possible, history suggests it would be the exception rather than the rule.
Figure 3. Odds of Positive Payroll Prints Over the Next 3 Months by Hiring Plans
Sources: National Federation of Independent Businesses, Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of July 2026.
That does not mean payroll growth is about to surge. In fact, high NFIB readings have been much better at signaling that payrolls are unlikely to contract than at predicting an acceleration in job growth. But July's negative headline employment print arriving at the same time small businesses were reporting their strongest hiring intentions in nearly four years does not exactly line up with an economy suddenly falling into recession.
For now, the balance of evidence leans toward weak summer employment prints rather than the beginning of a sustained contraction, with the potential for activity to improve as the third quarter progresses.
Stop Looking at Me
Federal Reserve Governor Christopher Waller stated one month ago that, "Sternly staring at inflation until it melts before our withering gaze is not an option." Thus far, however, that is largely what the Federal Reserve has done.
Unlike the labor mandate, there is an exact inflation target: 2.0% over the longer run, as measured by the headline personal consumption expenditures (PCE) price index. Right now, that metric is running at 3.7% and has remained above target since February 2021.
Granted, the headline number reflects the recent uptick in oil prices, but even before that move, inflation had been stuck around 2.8% since the middle of 2025.
Figure 4. Personal Consumption Expenditure Deflator Gauges (YoY%)
Sources: Bureau of Economic Analysis, Bloomberg L.P., Federal Reserve Bank of Dallas, and Potomac. Data through June 2026. Note: Core PCE excludes food and energy. Trimmed Mean PCE removes the largest price increases and declines each month.
The more important inflation story, however, is not simply what is happening with oil prices. It is what is happening with services inflation excluding energy and housing, often referred to as "supercore" inflation.
Supercore matters because it represents more than half of the core PCE basket, roughly 55% to 60%. By comparison, core goods account for around 25%. That makes supercore the single largest component of underlying core inflation. If supercore remains stuck well above 2%, getting overall inflation sustainably back to target becomes considerably more difficult.
There are some signs that these pressures may finally be easing. The consumer price index version of supercore inflation has fallen for two consecutive months, dropping from roughly 3.7% to 2.8%. That should lean in the direction of additional downside in the PCE version as well. Historically, the monthly direction of supercore CPI has correctly anticipated the direction of the subsequently released supercore PCE reading roughly two-thirds of the time.
Still, the latest official supercore PCE reading remains elevated at roughly 3.8%.
And while the Fed may find it encouraging that supercore PCE has been gradually drifting lower, the pace up until now has been painfully slow. Since the Fed's last rate hike in July 2023, supercore inflation has declined by only about 0.3 percentage point per year. If that pace were to continue, it would take roughly another 5½ years for supercore PCE to reach 2%, putting us somewhere around 2032.
That may eventually get the Fed Chair where he wants to go, but it may take until after his term ends on May 21, 2030 to get there. We still expect rate hikes.
Figure 5. Supercore PCE Inflation Index (Year-on-Year Percent Change)
Sources: Bureau of Economic Analysis, Bloomberg L.P., and Potomac. Data as of June 2026.
Weekly “Keeping it Strait” Highlights:
A mixed bag of data this week with a few notable takeaways. While oil prices popped up again as the on again / off again peace deal with Iran continues to whipsaw prices, other commodities like gold and silver fared better.
For the first time since April, the odds of Republicans winning the Senate have fallen below 50%. Texas, Ohio, and Alaska now look like coin flips with Democrats slightly in the lead in the polling. If accurate, this would likely give Democrats control of both chambers of Congress after the mid-term elections.
