The American job market is extraordinarily strong, as a report on Friday made clear, with unemployment at the lowest rate in half a century, rapidly rising wages and companies hiring at a breakneck pace.
But the good news now could become a problem for President Biden later on.
Mr. Biden and his associates pointed to the hiring madness 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 pay increased by 5.2% compared to the previous year. But the still dizzying pace of hiring and wage growth means the Federal Reserve may need to act more decisively to curb the economy as it tries to keep inflation in check.
Fed officials have been waiting for signs of a slowdown in the economy, and in the labor market in particular. They hope that employers’ voracious need for workers will balance with the supply of available candidates, as this would take away the pressure on wages, in turn paving the way for companies such as restaurants, hotels and retailers to moderate their increases. of price.
Moderation has remained elusive, which could cause central bankers to rapidly raise interest rates in an effort to cool the economy and curb the fastest inflation of the past four decades. As the Fed adjusts policy aggressively, it could increase the risk of the economy turning into a recession, instead of softly slowing into the so-called soft landing that central bankers have been trying to engineer.
“It is very unlikely that we will 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 more abrupt landing further down the road.”
Interest rates are a blunt instrument and, historically, large Fed adjustments have often triggered recessions. Share prices fell after Friday’s release, a sign that investors are concerned that the new figures have increased the odds of a bad economic outcome down the line.
While investors have focused on risks, the White House has welcomed the employment data as good news and a clear sign that the economy is not in a recession even as gross domestic product growth faltered this year.
“From the president’s point of view, a solid employment report is always extremely welcome,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “And this is a very strong work relationship.”
However, the report appeared to undermine the administration’s view on the direction of the economy. Mr. Biden and White House officials have argued for months that employment growth would slow down soon. They said deceleration would be a positive sign of the economy’s transition to more sustainable growth with lower inflation.
The lack of such a slowdown could be a sign of stubborn inflation than administration economists hoped, though White House officials offered no hint of their concern on Friday.
“We think this is good news for the American people,” White House press secretary Karine Jean-Pierre told reporters in a briefing. “We think we are still heading towards a transition towards more steady and stable growth.”
The state of employment in the United States
The increase in employment in July, which far exceeded expectations, shows that the labor market is not slowing despite the Federal Reserve’s efforts to cool the economy.
The Fed was also counting on cooling. Prior to the July employment report, a number of other data had suggested that the labor market was decelerating: wage growth had moderated fairly steadily; job opportunities, although still high, were declining; and unemployment insurance claims, although low, had increased.
The Fed welcomed this development, but the new figures called moderation into question. Average hourly wages have risen steadily since April on a monthly basis and Friday’s report closed a string of hires which means the job market has now returned to its prepandemic dimension.
“Reports like this underscore how much more the Fed has to do to reduce inflation,” said Blerina Uruci, US economist at T. Rowe Price. “The job market remains very hot.”
Central bankers have increased borrowing costs by three-quarters of a percentage point in each of the last two meetings, an unusually fast pace. Officials had hinted that they could slow down during the September meeting, raising rates by half a point, but that forecast was partly dependent on their expectation that the economy would cool significantly.
Instead, “I think this report makes three-quarters of a point the base case,” said Omair Sharif, founder of Inflation Insights, a research firm. “The job market is still firing at all costs, so this isn’t the kind of slowdown the Fed is trying to generate to ease the price pressures.”
Fed politicians usually embrace strong hiring and robust wage growth, but wages have risen so rapidly lately that it could make slowing inflation difficult. As employers pay more, they need to charge their customers more, improve their productivity, or impact profits. Raising prices is typically the simplest and most practical route.
Furthermore, as inflation has soared, robust wage growth has also failed to keep pace for most people. While wages rose 5.2% over the past year, much faster than the 2% to 3% earnings that were normal before the pandemic, consumer prices rose 9.1% over the year until June.
Fed officials are trying to bring the economy back to a point where both wage increases and inflation are slower, hoping that once prices start rising gradually again, workers can make wage gains that will they will leave better in a sustainable way.
“Ultimately, when you think about the medium and long term, price stability is what makes the whole economy work,” Fed chairman Jerome H. Powell said in his July press conference, explaining the rationale.
Some prominent Democrats have questioned whether the US should rely so heavily on Fed policies – which work by damaging the labor market – to cool inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, were among those who argued that there had to be a better way.
But most of the changes that Congress and the White House can institute to lower inflation would take time to implement. Economists estimate that the Biden administration’s climate and tax law, the Inflation Reduction Act, would have less effect on price increases in the short term, although it may help more over 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 hurting workers.
“The depth of strength in this labor 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 job market.”
However, the central bank could find itself in an awkward position in the coming months.
An inflation report scheduled for release on Wednesday is expected to show that consumer price hikes are moderate in July as gas prices drop. But fuel prices are volatile, and other signs that inflation are getting out of control are likely to persist: rents are rising rapidly and many services are becoming more expensive.
And the still hot job market is likely to reinforce the idea that conditions aren’t simmering fast enough. This could keep the Fed working to limit economic activity even as headline inflation shows the first, and perhaps temporary, signs of retreat.
“In the next couple of months we will slow down inflation,” said Sharif. “The business part of the equation is not cooperating right now, even as inflation cools overall.”
Isabella Simonetti contributed to the report.