A surprisingly robust June employment report reinforced that the U.S. labor market remains historically strong even when warnings of recession reach a feverish point. But that development, while good news for the Biden administration, is likely to keep the Federal Reserve on its aggressive path of interest rate hikes as it tries to cool the economy and curb inflation.
Today’s world of rapidly rising prices is complicated for economic policy makers, who are concerned that an overheated labor market could exacerbate persistent inflation. Instead of seeing the growing demand for labor as an unmitigated good, they hope to design a gradual and controlled slowdown in hiring and wage growth, which remain unusually strong.
Friday’s report offered early signs that the desired cooling is consolidating, as both labor earnings and wage increases moderated slightly. But hiring and revenue remained strong enough to bolster the view among Fed officials that the job market, like much of the economy, is safe: employers still want many more workers than available.
The new data is likely to keep central banks on track to make another large-scale rate hike at their meeting later this month as they try to restrict consumer and business spending and force the economy back to square one. balance.
“We’re starting to see these first signs of a slowdown, which is what we need,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with CNBC after the report was released. Still, he described the wage data as “only slightly” reassuring and said that “we are starting to move in the right direction, but there is still much more to do, and much more we will have to see.”
Fed officials began raising interest rates from near zero in March in an attempt to raise the price of many types of loans. Last month, the central bank raised its policy rate by 0.75 percentage points, the largest increase since 1994.
Central banks tend to adjust their policy only in quarter-point increments, but they have been accelerating the pace, as inflation is worryingly fast and stubborn. While Fed officials have said they will discuss a move of 0.5 to 0.75 percentage points at their July 26-27 meeting, a chorus of officials has said in recent days that they would support a second movement of 0.75 percentage points given the speed of inflation and strength. of the labor market.
As the Fed tries to curb the economy, Wall Street economists have warned that, instead, it could fit into a recession, and the Biden administration has been avoiding statements that are already getting there. A drop in overall growth data, a downturn in the housing market, and a slowdown in factory orders have fueled concern that the United States is on the brink of a recession.
Employment data powerfully contradict this narrative, because a shrinking economy typically does not add jobs, let alone at the current rapid pace.
Mr Biden welcomed the report on Friday, saying “our critics said the economy was too weak”, but that “we have added more jobs in the last three months than any administration in almost 40 years” .
Private sector voices agreed that the employment report showed an economy that did not appear to be in decline.
“Wage growth remains high and job loss rates are low,” wrote Nick Bunker, director of economic research at the Indeed job website, in a reaction note. “Someday we will see another recession, but today is not that day.”
The state of employment in the United States
Labor earnings continue to maintain their impressive careers, alleviating concerns of an economic slowdown but complicating efforts to fight inflation.
The contradictory moment of the economy – with rapidly rising prices, economic growth contracting and the unemployment rate approaching the minimum of 50 years – has been a challenge for Mr Biden, who has struggled to convey sympathy. to consumers struggling with higher prices while seeking credit for the strength of job recovery.
Mr Biden’s approval ratings have shrunk as price growth has accelerated. Confidence has suffered a particularly sharp blow in recent months amid rising gas prices, which topped $ 5 a gallon on average in early summer.
On Friday, Biden stressed that fighting inflation was his top economic priority, while praising the recent progress of the labor market.
“I know times are tough,” Mr Biden said in public statements. “Prices are too high. Families are facing a cost-of-living crisis. But today’s economic news confirms the fact that my economic plan is moving this country in a better direction.”
But unfortunately, for the administration and for workers across the United States, dealing with high prices will likely have some cost to the labor market.
As the price rises for consumers at the gas station and in the grocery aisle, the Fed believes it must control inflation quickly to set the economy on the path to healthy, sustainable growth.
The Fed’s tool for achieving this long-term positive outcome works by causing short-term economic pain. By making money expensive to apply for loans, the central bank can curb home buying and business expansions, which in turn will curb hiring and wage increases. According to the theory, as companies and households have less dollars to spend, demand will better align with supply and prices will stop rising.
Officials expect unemployment to rise as rates rise and the economy weakens, although they expect it to rise only slightly.
Fed officials still hope to design what they often call a “soft landing,” in which hiring and wage gains gradually increase, but without plunging the economy into a painful recession.
But achieving this will not be easy, and officials are willing to repress more strongly if that is what is needed to control inflation.
“Price stability is absolutely essential for the economy to reach its potential and maintain maximum employment in the medium term,” John C. Williams, president of the Federal Reserve Bank of New York, said Friday in a speech to Puerto Rico. “I want to be clear: it’s not an easy task. We have to be determined and we can’t fall short.”
Shares fell after the release of employment figures, probably because investors saw them as a sign that the Fed would continue to limit the economy.
“The huge boost in the economy for me suggests that we may move to 75 basis points at the next meeting and not see much prolonged damage to the economy as a whole,” Mr. Bostic Friday.
Fed officials are closely monitoring wage data in particular. Average hourly earnings rose 5.1 percent year-over-year to June, slightly below the previous month’s 5.3 percent. Wages for non-executives rose 6.4 percent more than a year earlier.
While this pace of growth is slowing somewhat, it is still much higher than normal, and could keep inflation high if it persists, as employers charge more to cover rising labor costs.
“Wages are not the main culprit for the inflation we are seeing, but in the future, they would be very important, especially in the services sector,” Fed Chairman Jerome H. Powell told a news conference at June.
“If you don’t have price stability, the economy really won’t work the way it should,” he added later. “It won’t work for people: their wages will be eaten.”
Inflation has been above the Fed’s target for more than a year. The measure of the personal consumption expenditure rate excluding food and energy prices, which the Fed monitors to detect underlying inflation trends, rose 4.7 percent during the year to May.
And this is the least dramatic of the major inflation measures. Prices rose 8.6 percent during the year through May, according to the consumer price index measurement, and the June issue, which will be released next week, may show a new recovery.
Central banks are increasingly concerned that high costs are infiltrating consumer inflation expectations, which will make price gains more difficult to eliminate. Once workers and companies begin to believe that prices will rise rapidly year after year, they can change their behavior, looking for larger wage increases and more regular price adjustments. This could make inflation a more permanent feature of the US economy.
The Fed wants to avoid this result. If it raises rates by 0.75 percentage points this month, it would bring interest rates to a range of 2.25 to 2.5 percent, and officials have indicated they will likely raise borrowing costs by another percentage point. at the end of the year.
“Supply and demand will rebalance and inflation will return to our long-term target of 2%,” Williams said. “It can take a while and it can be a road with accidents.”