Good news about jobs could mean bad news later as the hiring spree challenges the Federal Reserve
Friday’s report showed that America’s labor market is remarkably strong, with the unemployment rate at its lowest rate in half a century, wages rising rapidly and business hiring at a brisk pace.
But the good news now could become a problem for President Biden later.
Biden and his aides pointed to the wave of hiring as evidence that the United States is not in a recession and celebrated the report, which showed employers added 528,000 jobs in July and that salary rose 5.2 percent from the previous year. But the accelerating pace of employment and wage growth means the Federal Reserve may need to act more decisively to rein in the economy as it seeks to keep inflation under control.
Federal Reserve officials have been waiting for signs of a slowing economy, especially the labor market. They hope employers’ fierce need for workers will balance out the supply of available applicants, as that would take pressure off wages, and in turn pave the way for businesses such as restaurants, hotels and retailers to mitigate their price hikes.
Moderation has remained elusive, and that could keep central bankers rapidly raising interest rates in an effort to cool the economy and rein in the fastest inflation in four decades. With the Fed adjusting policy aggressively, this could increase the risk of the economy entering recession, rather than slowing gently into the so-called soft landing that central bankers have been trying to engineer.
“It is unlikely that we will fall into a recession in the near term,” said Michael Gaben, head of US economics research at Bank of America. “But I would also say that numbers like this increase the risk of a hard landing further out of the way.”
Interest rates are a blunt tool, and historically, the Fed’s large adjustments have often led to recessions. Stock prices fell after Friday’s release, a sign that investors are concerned that the new numbers have raised the odds of a bad economic outcome ahead.
Even as investors focused on risks, the jobs data was greeted by the White House as good news and a clear indication that the economy is not in a recession despite faltering GDP growth this year.
“From the president’s perspective, a strong jobs report is always very welcome,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “And this is a very strong jobs report.”
However, the report appears to undermine the administration’s view of the direction the economy is heading. Biden and White House officials have been stressing for months that job growth will slow soon. They said the slowdown would be a welcome sign of the economy’s transition to more sustainable growth with low inflation.
The absence of such a slowdown may be a sign of more stubborn inflation than administration economists had hoped, although White House officials offered no hint Friday that they were concerned about it.
“We think it’s good news for the American people,” White House press secretary Karen Jean-Pierre told reporters at a briefing. “We believe we are still moving towards a transition to more stable and stable growth.”
The state of jobs in the United States
Employment gains in July, which far exceeded expectations, show that the labor market is not slowing despite efforts by the Federal Reserve to cool the economy.
The Fed, too, was counting on calm. Ahead of the July employment report, a host of other data points indicated that the labor market was slowing: wage growth had steadily moderated somewhat. Vacancies, while still high, have been declining; While unemployment insurance filings rose, although they fell.
The Fed has welcomed this development – but the new numbers have called moderation into question. Average hourly earnings have been rising steadily since April on a monthly basis, and Friday’s report capped a streak of hiring which means the labor market is now back to its grim size.
“Reports like this only underscore how much the Fed needs to do to bring down inflation,” said Plerina Orochi, US economist at T Row Price. “The job market is still very hot.”
Central bankers raised borrowing costs by three-quarters of a percentage point in each of their last meetings, at an unusually fast pace. Officials had suggested they could slow down at their September meeting, raise rates by half a point – but that prediction hinges in part on their expectations that the economy will cool significantly.
Instead, “I think this report makes three-quarters of the point the base case,” said Omair Sharif, founder of research firm Inflation Insights. “The labor market is still operating at full capacity, so this is not the kind of slowdown the Fed is trying to make to relieve price pressures.”
Federal Reserve policymakers typically embrace strong hiring and strong wage growth, but wages have risen so quickly lately that they may make it difficult to slow inflation. Since employers pay more, they must either charge their customers more, improving their productivity, or hurting their profits. Raising prices is usually the easiest and most practical way.
Plus, with inflation rising, even strong wage growth has failed to keep pace with most people. While wages have risen 5.2 percent over the past year, much faster than the 2 percent to 3 percent gains that were normal before the pandemic, consumer prices jumped 9.1 percent in the year to June.
Fed officials are trying to steer the economy to a place where both wage gains and inflation are slower, hoping that once prices start gradually rising again, workers can make wage gains that put them better off in a sustainable way.
Jerome H. said: Powell, Fed Chairman, at his press conference in July, explained the rationale: “Ultimately, if you think about the medium and long term, price stability is what makes the entire economy work.”
Some prominent Democrats have questioned whether the US should rely too heavily on the Fed’s policies – which work by hurting the labor market – to cool inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, were among those who argued that a better way was needed.
But most of the changes Congress and the White House can make to lower inflation will take time to wrap up. Economists estimate that the Biden administration’s climate and tax law, the inflation-reducing law, will have little effect on price increases in the near term, although it may help more over time.
While the White House avoided saying what the Fed should do, Mr. Bernstein of the Council of Economic Advisers suggested that Friday’s report could give the Fed more protection to raise interest rates without hurting workers.
“The depth of power in this labor market is not just a barrier for working families,” he said. “It also gives the Federal Reserve space to do what they need to do while trying to maintain a strong labor market.”
However, the central bank may find itself in an uncomfortable place in the coming months.
The inflation report due for release on Wednesday is expected to show that increases in consumer prices moderated in July with lower gas prices. But fuel prices are volatile, and other signs that inflation remains out of control are likely to persist: rents are rising rapidly, and the cost of many services is increasing.
The still-hot labor market is likely to reinforce the view that conditions are not boiling fast enough. That may keep the Fed working to rein in economic activity even as there are early, and perhaps temporary, signs of a downturn.
“We will work to slow inflation in the next two months,” Sharif said. “The activity part of the equation is not cooperating now, even if inflation generally subsides.”
Isabella Simonetti Contribute to the preparation of reports.