Good news on jobs could mean bad news later as hiring spree defies Fed

America’s job market is remarkably strong, a report clarified on Friday, with unemployment at the lowest rate in half a century, wages rising rapidly and companies hiring at an alarming pace.

But now the good news could turn into trouble for President Biden later.

Mr Biden and his colleagues point to the hiring spree as evidence that the United States is not in a recession and celebrated the report, which showed employers 528,000 jobs were added in July, and that salary increased by 5.2 percent from a year earlier. But still the pace of hiring and wage growth means the Federal Reserve may need to act more decisively to control the economy as it seeks to keep inflation under control.

Fed officials are waiting for signs that the economy, and in particular the job market, is slowing. They hope that employers’ excessive need for workers will balance out with the supply of available applicants, as this will reduce wage pressure, in turn controlling the increase in their prices for businesses such as restaurants, hotels and retailers. There will be a way to do so.

Moderation remains elusive, and it could lead central bankers to sharply raise interest rates in an effort to cool the economy and control inflation, the fastest in four decades. As the Fed adjusts policy aggressively, it could increase the risk that the economy is headed for a recession, rather than just slowing down gradually into the so-called soft landing that central bankers are trying to engineer.

“We are very unlikely to be hit by a recession in the near term,” said Michael Gapen, head of US economics research at Bank of America. “But I would also say that numbers like these run the risk of a sharp landing down the road.”

Interest rates are a blunt tool, and historically, large Fed adjustments have often set off recessions. Stock prices fell after Friday’s release, a sign that investors are concerned that the new data raises the odds of a poor economic outcome down the line.

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Even as investors took note of the risks, the White House congratulated the jobs data as good news and a clear sign that the economy is not in recession, even as GDP growth this year. You have stumbled

“From the president’s point of view, a strong jobs report is always welcome,” Jared Bernstein, a member of the White House Council of Economic Advisors, said in an interview. “And that’s a very strong jobs report.”

Still, the report appeared to undermine the administration’s view of where the economy is headed. Mr Biden and White House officials have been arguing for months that job growth will soon slow down. He said the slowdown would be a welcome sign of the economy’s transition 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 on Friday gave no indication they were concerned about it.

“We think this is good news for the American people,” White House press secretary Carine Jean-Pierre told reporters at a briefing. “We think we are still moving towards the transition to more stable and stable growth.”

The Fed was also counting on the cool-down. Prior to the July employment report, several other data points suggested that the job market was in decline: wage growth was declining sharply; Job opportunities, while still high, were declining; And unemployment insurance filings, while low, were rising.

The Fed had welcomed that development – but the new data called moderation into question. Average hourly earnings have risen steadily since April on a monthly basis, and Friday’s report narrowed a hiring streak, meaning the job market is now back to its former size. .

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“Reports like these emphasize how much more the Fed needs to do to reduce inflation,” T. Blarina Urusi, an American economist at Roe Price, said. “The labor market remains very hot.”

Central bankers have raised borrowing costs by three-quarters of a percent at an unusually fast pace in each of their last two meetings. Officials had suggested they could raise rates by half a point at their meeting in September – but that forecast partly depends on their expectation that the economy will clearly cool down.

Instead, “I think this report makes the three-quarters point a base case,” said Omair Sharif, founder of Inflation Insights, a research firm. “The labor market is still firing on all cylinders, so it’s not the kind of bearishness the Fed is trying to generate to ease price pressure.”

Fed policymakers typically embrace strong hiring and strong wage growth, but recently wages have been rising so rapidly that they can make it difficult to slow inflation. As employers pay more, they must either charge their customers more, improve their productivity or take a hit on their profits. Raising prices is usually the easiest and most practical route.

Also, as inflation has risen, strong wage growth has also failed to keep up for most people. While wages climbed 5.2 percent over the past year, far faster than the 2 percent to 3 percent gains that were normal before the pandemic, consumer prices rose 9.1 percent in the year through June.

Fed officials are trying to steer the economy back to a place where wage benefits and inflation are both slowing, hoping that once prices slowly start climbing again, workers can receive wage benefits that allow them to Leaves the better way permanently.

“Ultimately, if you think about the medium and long term, price stability is what keeps the entire economy working,” Fed Chairman Jerome H. Powell explained the reasoning at his July news conference.

Some prominent Democrats have questioned whether the United States should rely so heavily on Fed policies – which work by damaging the labor market – to quell inflation. Senator Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, are among those to argue there must be a better way.

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But most changes that Congress and the White House can make to reduce inflation will take time to come into play. Economists predict that the Biden administration’s climate and tax bill, the Inflation Reduction Act, will have a modest impact on price increases in the near term, though it may help more over time.

While the White House has refrained from saying what the Fed should do, Mr Bernstein of the Economic Advisory Council 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 they need to do while trying to maintain a strong labor market.”

Still, the central bank could find itself in an uncomfortable position in the months ahead.

An inflation report to be released on Wednesday is expected to show that the reduction in gas prices in July led to an increase in consumer prices. But fuel prices are volatile, and there are other signs that inflation remains out of control: Fares 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 easing quickly. This could work for the Fed to rein in economic activity, even as overall inflation shows early, and perhaps temporary, signs of pulling back.

“We are going to bring down inflation in the next few months,” Mr. Sharif said. “The activity part of the equation is not cooperating right now, even if inflation calms down overall.”

Isabella Simonetti Contributed to reporting.