Good jobs news can mean bad news later as hiring frenzy challenges the Fed
The U.S. labor market is remarkably strong, according to a report on Friday, with the unemployment rate at its lowest in half a century, rapidly rising wages and businesses hiring at a blistering pace.
But the good news could now become a problem for President Biden later.
Mr. Biden and his aides pointed to the hiring spree as proof that the United States is not in a recession and celebrated the report, which showed that employers added 528,000 jobs in July and that salary was up 5.2% from a year earlier. But the still blistering pace of hiring and wage growth means the Federal Reserve may need to act more decisively to rein in the economy as it seeks to tame inflation.
Fed officials were waiting for signs that the economy, and in particular the labor market, was slowing. They hope employers’ voracious need for workers will balance out with the supply of available candidates, as this would reduce pressure on wages, paving the way for businesses like restaurants, hotels and retailers to moderate their increases. of price.
Moderation has remained elusive, and that could prompt central bankers to rapidly raise interest rates in a bid to cool the economy and rein in the fastest inflation in four decades. As the Fed adjusts policy aggressively, it could increase the risk of the economy tipping into a recession, instead of gently slowing down in the so-called soft landing that central bankers have been trying to enact.
“We are very unlikely to fall into a recession in the short term,” said Michael Gapen, head of US economic research at Bank of America. “But I would also say that numbers like this increase the risk of a harder landing further down the road.”
Interest rates are a blunt tool and historically large Fed adjustments have often triggered recessions. Share prices fell after Friday’s release, a sign that investors fear the new figures will raise the odds of a bad economic outcome down the line.
Even as investors focused on risk, the White House hailed the jobs data as good news and a clear sign that the economy is not in recession, even as gross domestic product growth has slowed. weakened this year.
“From the president’s perspective, a strong jobs report is always extremely welcome,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “And that’s a very strong employment report.”
Still, the report appears to undermine the administration’s view of where the economy is headed. Mr. Biden and White House officials have argued for months that job growth would soon slow. They said the deceleration would be a welcome sign of the economy transitioning to more sustainable growth with lower inflation.
The lack of such a slowdown could be a sign of more stubborn inflation than administration economists had hoped, although White House officials on Friday hinted that they would not. worried.
“We think this is good news for the American people,” White House press secretary Karine Jean-Pierre told reporters at a press briefing. “We believe we are still heading towards a transition to more steady and stable growth.”
The state of employment in the United States
Employment gains in July, which far exceeded expectations, show the labor market is not slowing despite the Federal Reserve’s efforts to cool the economy.
The Fed, too, was counting on a cooling. Prior to July’s jobs report, a host of other data points had suggested the labor market was slowing: wage growth had been moderating fairly steadily; job vacancies, although still high, had declined; and unemployment insurance deposits, although weak, had increased slightly.
The Fed had welcomed the move – but the new numbers called moderation into question. Average hourly wages have risen steadily since April on a monthly basis, and Friday’s report capped a streak of hiring, meaning the labor market is now back to pre-pandemic heights.
“Reports like this underscore how much more the Fed needs to do to reduce inflation,” said Blerina Uruci, US economist at T. Rowe Price. “The labor market remains very hot.”
Central bankers have raised borrowing costs by three-quarters of a percentage point in each of their last two meetings, an unusually fast pace. Officials had suggested they might slow down at their September meeting, raising rates by half a point – but that forecast was partly based on their expectation of a marked cooling in the economy.
Instead, “I think this report makes three-quarters of a point the baseline scenario,” said Omair Sharif, founder of inflation insights, a research firm. “The labor market is still firing on all cylinders, so this isn’t the kind of slowdown the Fed is trying to generate to ease price pressures.”
Fed policymakers generally embrace strong hiring and robust wage growth, but wages have risen so rapidly of late that they could make it difficult to slow inflation. As employers pay more, they must either charge their customers more, improve their productivity, or reduce their profits. Raising prices is usually the easiest and most practical route.
Moreover, while inflation has soared, even strong wage growth has not kept pace for most people. While wages have risen 5.2% over the past year, much faster than the 2-3% gains that were normal before the pandemic, consumer prices jumped 9.1% on the year until June.
Fed officials are trying to get the economy back to a place of slower wage gains and inflation, hoping that once prices start to climb again gradually, workers can get wage gains that will improve them. in a sustainable way.
“At the end of the day, if you think about the medium to long term, price stability is what makes the whole economy work,” Fed Chairman Jerome H. Powell said at his conference. release of July, explaining the rationale.
Some prominent Democrats have questioned whether the United States should rely so heavily on Fed policies — which work by hurting the labor market — to rein in inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, are among those who argue there must be a better way.
But most of the changes that Congress and the White House can institute to reduce inflation would take time to materialize. Economists say the Biden administration’s climate and tax bill, the Curbing Inflation Act, would have a minor effect on near-term price increases, though it could help more with time.
While the White House avoided saying what the Fed should do, Bernstein of the Council of Economic Advisers suggested Friday’s report could give the Fed more cushion to raise rates without harming workers.
“The depth of strength in this labor market is not just a buffer for working families,” he said. “It also gives the Fed the ability to do what it needs to do while trying to maintain a strong labor market.”
Still, the central bank could find itself in an uncomfortable position in the coming months.
An inflation report due out on Wednesday is expected to show consumer price increases moderated in July as gasoline prices fell. But fuel prices are volatile and other signs that inflation remains out of control are likely to persist: rents are rising rapidly and many services are becoming more expensive.
And the still hot labor market is likely to reinforce the view that conditions are not deteriorating fast enough. This could allow the Fed to strive to restrain economic activity even if headline inflation shows early, and perhaps temporary, signs of easing.
“We are going to get a slowdown in inflation in the next two months,” Mr. Sharif said. “The activity part of the equation is not cooperating right now, even if headline inflation is cooling.”
Isabelle Simonetti contributed report.