The US labor market is remarkably strong, a report made clear on Friday, with unemployment at the lowest rate in half a century, wages rising rapidly and companies hiring at a breakneck pace.
But good news now could become a problem for President Biden later.
Biden and his aides pointed to the hiring spree as proof America is not in a recession and welcomed the report, which showed US employers added 528,000 jobs in July and wages rose 5.2 percent. in one year. earlier. But the still breakneck pace of hiring and wage growth means the Federal Reserve may need to act more decisively to tighten the economy as it tries to bring inflation under control.
Fed officials have been waiting for signs that the economy, and particularly the labor market, is slowing. They hope employers’ ravenous need for workers will be balanced by the supply of available applicants, because that would reduce pressure on wages and, in turn, pave the way for businesses like restaurants, hotels and retailers to moderate their price increases. .
Dovishness has remained elusive, and that could prompt central bankers to rapidly raise interest rates in an effort to cool the economy and contain the fastest inflation in four decades. As the Fed tightens policy aggressively, it could increase the risk of the economy slipping into a recession, rather than slowing smoothly into the so-called soft landing that central bankers have been trying to engineer.
“It is highly unlikely that we will slide into a recession any time soon,” 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 later on.”
Interest rates are a blunt tool, and historically, large Federal Reserve adjustments have often triggered recessions. Stock prices fell after Friday’s release, a sign that investors are concerned the new numbers increase the odds of a poor economic outcome going forward.
Even as investors focused on the risks, the White House greeted the jobs data as good news and a clear sign the economy is not in a recession even though gross domestic product growth has faltered 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 employment report.”
Still, the report appeared to undermine the administration’s view of where the economy is headed. Biden and White House officials have argued for months that job growth will soon slow. They said the slowdown would be a good 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 expected, though White House officials gave no indication Friday that they were worried about that.
“We think this is good news for the American people,” White House press secretary Karine Jean-Pierre told reporters at a briefing. “We believe we are still headed for a transition to more consistent and stable growth.”
The State of Employment in the United States
Job 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 had also been counting on a cooldown. Before the July jobs report, a number of other data points had suggested the labor market was slowing: wage growth had moderated fairly steadily; job offers, although still high, had been declining; and unemployment insurance claims, while down, had been on the rise.
The Fed had welcomed that development, but the new numbers called the dovishness into question. Average hourly earnings have risen steadily since April on a monthly basis, and Friday’s report capped a hiring streak that means the job market is now back to its pre-pandemic size.
“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 is still very active.”
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 suggested they could slow down at their September meeting, raising rates by half a point, but that forecast hinged in part on their expectation that the economy would cool markedly.
Instead, “I think this report represents three-quarters of the base case,” said Omair Sharif, founder of Inflation Insights, a research firm. “The labor market is still firing on all cylinders, so this is not the kind of slowdown the Fed is trying to create to ease price pressures.”
Fed policymakers typically accept strong hiring and solid wage growth, but wages have been rising so fast lately that they could make it harder to slow inflation. As employers pay more, they must charge their customers more, improve their productivity, or reduce their profits. Raising prices is often the easiest and most practical route.
Furthermore, as inflation has soared, even strong wage growth has failed to keep up for most people. While wages rose 5.2 percent over the past year, much faster than the 2 to 3 percent gains that were normal before the pandemic, consumer prices rose 9.1 percent over the past year. the year until June.
Fed officials are trying to get the economy back to a place where both wage gains and inflation are slower, hoping that once prices start to gradually rise again, workers will be able to reap wage gains. that leave them better in a sustainable way.
“Ultimately, if you think about the medium to long term, price stability is what makes the whole economy tick,” Fed Chairman Jerome H. Powell said at his July press conference, explaining the reason.
Some prominent Democrats have questioned whether the United States should rely so heavily on Fed policies, which work by hurting the labor market, to cool 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 estimate that the Biden administration’s tax and climate bill, the Reduce Inflation Act, would have less of an effect on price increases in the short term, though it may help more over time.
While the White House has avoided saying what the Fed should do, Bernstein of the Council of Economic Advisers suggested Friday’s report could give the Fed more room to raise rates without hurting workers.
“The depth of the force in this job market is not just a buffer for working families,” he said. “It also gives the Fed room to do what it needs to do while trying to maintain a strong labor market.”
Still, the central bank could find itself in an awkward spot in the coming months.
An inflation report due on Wednesday is expected to show consumer price increases moderated in July as gasoline prices eased. 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 active job market is likely to reinforce the view that conditions are not calming down fast enough. That could see the Fed keep working to restrict economic activity even as headline inflation shows early, and perhaps temporary, signs of receding.
“Inflation will slow down in the coming months,” Sharif said. “The activity side of the equation is not cooperating at the moment, even if headline inflation cools.”
Isabella Simonetti contributed report.