A surprisingly robust employment report from June reinforced that the US labor market remains historically strong even when economic downturns reach a fever level. But this development, although good news for the Biden administration, is likely to keep the Federal Reserve on its aggressive path of raising interest rates as it tries to cool the economy and curb inflation.
Today’s world of rapid price increases is complicated for economic decision – makers, who are worried that an overheated labor market could exacerbate persistent inflation. Instead of looking at the roaring demand for labor as an unlimited good, they hope to construct a gradual and controlled decline in employment and wage growth, both of which remain unusually strong.
Friday’s report gave early signs that the desired cooling is gaining ground as both job gains and wage increases moderated slightly. But employment and earnings remained solid enough to reinforce the perception among Fed officials that the labor market, like much of the economy, is out of the question: Employers will still have far more workers than are available.
The new data is likely to keep central bankers on track to raise prices for a new supersize rate at their meeting later this month, as they try to curb consumer and business spending and force the economy back into balance.
“We are beginning to see the first signs of decline, which is what we need,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in a CNBC interview after the report was released. Still, he called the wage data “just a little” reassuring and said that “we are starting to move in the right direction, but there is still a lot more to do, and a lot more we need to see.”
Fed officials began raising interest rates from almost zero in March in an effort to make many kinds of loans more expensive. Last month, the central bank raised its key interest rate by 0.75 percentage points, the largest single increase since 1994.
Central bankers usually adjust their policies only in steps of a quarter of a point, but they have increased the pace as inflation proves to be alarmingly fast and stubborn. While Fed politicians have said they will discuss a move between 0.5 or 0.75 percentage points at their July 26 and 27 meeting, a chorus of officials have said in recent days that they will support a new move of 0, 75 percentage points given the rate of inflation and the strength of the labor market.
While the Fed is trying to put the brakes on the economy, Wall Street economists have warned that it could instead turn it into a recession – and the Biden administration has averted statements that one is already arriving. A decline in general growth data, a decline in the housing market and a decline in factory orders have led to concerns that America is on the brink of a downturn.
The employment data strongly contradict this narrative, because a shrinking economy usually does not add jobs, let alone at the current fast pace.
Mr. Biden celebrated the report on Friday, saying that “our critics said the economy was too weak”, but that “we have still added more jobs in the last three months than any administration in almost 40 years.”
Votes in the private sector agreed that the employment report showed an economy that did not seem to break down.
“Wage growth remains high and the number of jobs is low,” wrote Nick Bunker, director of economic research at the job site Indeed, in a response note. “We will see a new recession one day, but today is not that day.”
The job state in the United States
Job gains continue to maintain their impressive run, easing concerns about an economic downturn but complicating efforts to combat inflation.
The controversial moment in the economy – with rapidly rising prices, declining economic growth and unemployment near a 50-year low – has been a challenge for Mr. Biden, who has struggled to convey sympathy for consumers struggling with higher prices while They seek credit for the strength of job recovery.
Mr. Biden’s approval ratings have fallen as inflation has accelerated. Self-esteem has taken a particularly pronounced hit in recent months amid rising gas prices, which peaked at $ 5 per gallon on average earlier this summer.
On Friday, Biden stressed that fighting inflation was his highest economic priority, while praising the recent progress in the labor market.
“I know times are tough,” Mr. Biden said in public remarks. “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 America, dealing with high prices is likely to cost the labor market something.
As prices increase, it hurts consumers at the petrol pump and in the grocery store, the Fed believes that it must get inflation under control quickly to put the economy on the path to healthy and sustainable growth.
The Fed’s tools for achieving the positive long-term outcome work by causing short-term financial pain. By making money expensive to borrow, the central bank can slow down home purchases and business expansions, which in turn will slow down employment and wage increases. As companies and families have fewer dollars to spend, the theory is that demand will be better in line with supply and prices will stop shooting higher.
Officials expect that unemployment will eventually pick up as interest rate rises bite and the economy weakens, although they hope it will rise only slightly.
Fed policy makers continue to hope to construct what they often call a “soft landing,” in which employment and wage growth slowly but surely plunge the economy into a painful recession.
But it will not be easy to achieve that – and officials are willing to strike harder if that is what it takes to tame inflation.
“Price stability is crucial 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 in a speech in Puerto Rico on Friday. “I want to be clear: this is not an easy task. We have to be determined and we can not fall short. “
Shares fell after the release of the employment figures, probably because investors saw them as a sign that the Fed would continue to constrain the economy.
“The enormous momentum in the economy for me suggests that we can move on 75 basis points at the next meeting and not see much long-term damage to the broader economy,” Bostic said on Friday.
Fed officials pay particular attention to payroll data. Average hourly earnings rose by 5.1 per cent in the year to June, slightly down from 5.3 per cent the month before. Wages for non-managers rose by a rapid 6.4 per cent from the previous year.
Although the rising pace is slowing somewhat, it is still much higher than normal – and can keep inflation up if it persists, as employers charge more to cover rising wage costs.
“Wages are not primarily responsible for the inflation we see, but going forward they will be very important, especially in the services sector,” Fed Chairman Jerome H. Powell told a news conference in June.
“If you do not have price stability, the economy will really not work as it should,” he added later. “It will not work for people – their wages will be eaten up.”
Inflation has been above the Fed’s target for more than a year. The index of personal consumption expenditure excluding food and energy prices, which the Fed monitors for a sense of underlying inflation trends, rose 4.7 per cent during the year to May.
And that is the least dramatic of the major inflation measures. Prices climbed by 8.6 per cent during the year to May, measured by the consumer price index, and the June figure, set for publication next week, may show a further rise.
Central bankers are increasingly concerned that high costs will seep into consumers’ inflation expectations, making price gains harder to stop. When workers and companies begin to believe that prices will rise rapidly year after year, they can change their behavior, seeking larger wage increases and more regular price adjustments. This could make inflation a more permanent feature of the US economy.
The Fed wants to prevent this result. If it raises interest rates by 0.75 percentage points this month, it will bring interest rates to a range of 2.25 to 2.5 percent, and officials have signaled that they are likely to increase borrowing costs by another percentage point by the end of the year.
“Supply and demand will be brought back into balance, and inflation will return to our 2 percent long-term target,” Williams said. “This may take some time and may well be a bumpy road.”