The US job market is remarkably strong, a report found Friday, with unemployment at its lowest level in half a century, wages rising rapidly and companies hiring at breakneck speed.
But the good news today could become a problem for President Biden later on.
Mr Biden and his associates pointed to the hiring boom as proof that the United States is not in a recession and celebrated the report, which showed employers added 528,000 jobs in July and wages rose 5.2 percent from the previous year. a year earlier. But the still blazing pace of hiring and wage growth means the Federal Reserve may need to act more decisively to contain the economy as it tries to control inflation.
Fed officials have been waiting for signs that the economy, especially the job market, is slowing. They hope employers’ voracious need for workers will balance out the supply of available job applicants, as that would put pressure on wages, which in turn paves the way for businesses like restaurants, hotels and retailers to temper their price hikes. .
Moderation has remained elusive, which could prompt central bankers to raise interest rates quickly in a bid to cool the economy and contain the fastest inflation in four decades. Aggressive changes by the Fed could increase the risk of the economy slipping into recession, rather than slowing down in the so-called soft landing that central bankers have been trying to bring about.
“It is very unlikely that we will enter a recession any time soon,” 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 sharper landing further down the road.”
Interest rates are a blunt instrument, and historically, major Fed adjustments have often caused recessions. Share prices fell after Friday’s release, a sign that investors are concerned that the new data may increase the likelihood of a bad economic outcome later on.
Even as investors focused on the risks, the White House hailed the jobs data as good news and a clear sign that the economy is not in recession, even though gross domestic product growth has stalled this year.
“From the president’s perspective, a strong jobs report is always very welcome,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “And this is a very strong jobs report.”
Still, the report seemed to undermine the government’s view on the direction of the economy. Mr Biden and White House officials have been calling for an early slowdown in job growth for months. They 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 persistent inflation than government economists had hoped, though White House officials gave no hint on Friday that they were concerned.
“We think it’s good news for the American people,” White House press secretary Karine Jean-Pierre told reporters in a briefing. “We think we’re still on the road to a transition to more steady and stable growth.”
The State of Jobs in the United States
The July job gains, which far exceeded expectations, show that the labor market is not slowing despite attempts by the Federal Reserve to cool the economy.
The Fed also expected a cooling. Before the July employment report, plenty of other data had suggested that the labor market was slowing: wage growth had slowed quite steadily; vacancies, while still high, had declined; and unemployment insurance claims, although low, had risen.
The Fed had welcomed that development, but the new data cast doubt on the moderation. Average hourly wages have risen steadily on a monthly basis since April and Friday’s report has brought an end to a string of hires, meaning the job market has now returned to its prepandemic size.
“Reports like these highlight how much more the Fed needs to do to curb inflation,” said Blerina Uruci, an American economist at T. Rowe Price. “The labor market remains very hot.”
Central bankers have increased borrowing costs by three-quarters of a percentage point at each of their last two meetings, an unusually fast pace. Officials had suggested they slow down and raise rates by half a point at their September meeting, but that prediction depended in part 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 labor market is still running on all cylinders, so this isn’t the kind of slowdown the Fed is trying to generate to ease price pressures.”
Fed policymakers tend to embrace strong hiring and robust wage growth, but wages have risen so quickly lately that they could make it difficult to slow inflation. As employers pay more, they must charge their customers more, improve their productivity or reduce their profits. Raising prices is usually the easiest and most practical route.
And as inflation has risen, even robust wage growth has failed to keep pace for most people. While wages have risen 5.2 percent in the past year, much faster than the 2 to 3 percent increase that was normal before the pandemic, consumer prices rose 9.1 percent over the year through June.
Fed officials are trying to steer the economy back to a place where both wage increases and inflation are slower, in hopes that once prices begin to rise gradually again, workers can earn wage increases that will make them better off in a sustainable way.
“Ultimately, if you think about the medium and long term, price stability is what makes the entire economy work,” Fed chairman Jerome H. Powell said at his July press conference, explaining the rationale.
Some prominent Democrats have questioned whether the United States should rely so heavily on Fed policies — which work by hurting the labor market — to cool inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, were among those who argued there must be a better way.
But most of the changes Congress and the White House can make to lower inflation would take time. Economists estimate that the Biden administration’s climate and tax law, the Inflation Reduction Act, would have a small effect on price increases in the short term, though it could help more over time.
While the White House has avoided saying what the Fed should do, Mr. Bernstein of the Council of Economic Advisers suggested Friday’s report could give the Fed more support to raise interest rates without harming workers.
“The strength of this job 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 awkward place in the coming months.
An inflation report to be released on Wednesday is expected to show consumer price hikes slowing in July as gas prices fell. But fuel prices are volatile and other signs that inflation is spiraling out of control are likely to continue: rents are rising rapidly and many services are becoming more expensive.
And the still hot job market is likely to reinforce the impression that conditions are not simmering fast enough. That could prompt the Fed to curb economic activity even as headline inflation shows early, and perhaps temporary, signs of retreat.
“Inflation will slow down in the coming months,” said Mr Sharif. “The activity portion of the equation is not cooperating right now, even if inflation cools in general.”
Isabella Simonetti reporting contributed.
