There are upside down moments in economics. We are in the middle of one.
Employers added 263,000 new jobs in November and wages rose 5.1% year over year. It’s good news. This is also bad news.
First, the good news. Economists continue to predict a slowdown, and some believe a recession is approaching. But you can’t really have a recession if companies keep hiring and giving raises. Strong jobs and strong wages encourage people to keep spending, and consumer spending keeps the US economy strong. “This expansion just keeps going,” University of Michigan economist Justin Wolfers tweeted on December 2, following the publication of the reports. “Remember all that talk about the recession? It was absurd. Bullshit.
The bad news is inflation. The monthly employment report does not directly measure inflation. It’s another report. But wages affect inflation because when they rise, employers try to pass the higher costs onto consumers by raising prices. The Federal Reserve wants to see wage growth fall, not rise, because that would be proof that inflation is moderating. But wage growth is not slowing down, it is accelerating. Wages increased from October to November, and the Ministry of Labor also revised upwards the figures for October and September.
“The jobs report is encouraging for workers”, Harvard economist Jason Furman tweeted, “but disheartening to the Fed’s hopes that the slowing in wages will make it easier. You probably want to revise your view on inflation and not in a favorable direction.
The biggest problem in the economy is inflation, not jobs. Inflation has been falling since peaking at 9.1% in June. It is at 7.7% now. But the Fed wants to lower it below 3%. To do this, the Fed has raised interest rates since March, driving up the cost of borrowing.
This normally slows the economy because it makes money more expensive and businesses and consumers borrow less. But the hot job market means the economy isn’t slowing enough. Fed Chairman Jerome Powell can’t say, but he’d be thrilled if companies stopped hiring and wages fell. It would be the slowdown that signals the Fed’s magic is working. Then the Fed could stop raising rates.
[Follow Rick Newman on Twitter, sign up for his newsletter or sound off.]
For now, the Fed must continue. Furman thinks inflation will only fall to around 5% at the current rate of wage growth. So, in theory, the Fed will have to work harder and raise rates more to get inflation where it wants to be.
A key question is whether the strong wage growth is a temporary result of the COVID-related distortions of the past two years or a lasting phenomenon driven by deep structural changes. The data suggests wages have reset to new higher levels, as seen in the chart below. If you disregard the sharp up-and-down swings around the 2020 COVID outbreak, it seems pretty clear that there was a post-pandemic increase in wages.
If this lasts, it means that interest rates will have to rise a little more to bring inflation down. The whole problem with this is that it could slow the economy more than expected and cause a full-blown recession. Stocks sold off after the ‘good’ jobs report because investors don’t like the negative implications: higher interest rates, reduced corporate profitability and a longer return to economic normalization. inflation.
Ordinary people may wonder why the Fed won’t just tolerate higher inflation if the labor market is strong and wages are rising. It’s a fair question. The people at the Fed are smart, but so is Elizabeth Warren, the Democratic senator from Massachusetts who thinks the Fed is being too aggressive. Warren and others worry that the Fed is going too far and causing a recession that will hurt workers more than the inflation the Fed is trying to fight.
President Biden is happy to talk about job growth and wage growth, and why not. The White House is right when it says job creation during Biden’s presidency so far is the strongest in history. It’s an oddity of timing, since Biden entered office just as the strong post-COVID recovery was gaining momentum. But that doesn’t make the factoid wrong.
The Fed and many economists are obsessed with what the economy will do in three or six months, because there is a lag between Fed actions, such as raising rates, and the impact they have on the economy. real economy. But ordinary people don’t need to think that way. There are many jobs and salaries are moving in the right direction. It’s pretty good, so far.
Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman
Click here for the latest tech news, reviews and helpful tech and gadget articles
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app to Apple Where android
Follow Yahoo Finance on Twitter, Facebook, instagram, Flipboard, LinkedInand Youtube
#week #Bidenomics #stops #hiring