Economy hits a plot twist as jobs report joins conflicting signals

It has been an increasingly puzzling week for market watchers and economists alike, as the American economy continues to resist a recession and stymy policymakers hoping to lower inflation and stave off a downturn.

A gangbusters September jobs report is putting the efficacy of Federal Reserve interest rate hikes into question, just as falling crude oil prices spell further inflation relief at the gas pump.

While the threat of an imminent economic downturn has once again retreated into the distance, securities markets are straining under a lack of leadership in the House, and the resumption of student loan payments risks denting consumer spending.

Add in one of the largest healthcare strikes in U.S. history along with soaring housing costs supercharged by rate hikes, and the economic outlook is continuing to surprise.

Here’s a look back at the major stories in the economy this week and a glimpse ahead at where it’s heading.

Labor market laughs off rate hikes

The recent strength of the labor market has thrown many economists for a loop and caused capital markets to whipsaw as they worried about more rate hikes.

The economy added 336,000 jobs in September, nearly doubling what economists had been expecting and extending a longer-term trend of upside surprises in the post-pandemic labor market.

Big upward revisions for July and August added 119,000 more jobs than previously reported, while the unemployment rate for September held steady at 3.8 percent.

While some have questioned the very efficacy of monetary policy within the $25-trillion U.S. economy, others point to major fiscal initiatives from Congress that are working in the opposite direction of the Fed’s intended cooling.

“The economy has moved less in the direction the Fed is trying to get it than we’ve seen in the past, but that can easily be attributed to the context in which the Fed is working,” Claudia Sahm, founder of Sahm Consulting and a former Federal Reserve economist, told The Hill.

“The Fed works through demand. Not only have we had a lot of fiscal support and relief during the pandemic, we have three major pieces of investment legislation that are rolling out. The fiscal is putting a lot of money into the economy while the Fed is trying to pull it out,” she said, referring to the Biden administration’s signature economic initiatives, comprising the Inflation Reduction Act, CHIPS and Science Act, and Bipartisan Infrastructure Law.

Other good news in the labor market was clear in the Labor Department’s job openings survey, which saw the number of open jobs spike to 9.6 million in August from 8.9 million in July.

That puts the ratio of job-seekers to open jobs at 1.5, a number that still favors workers.

Sinking energy prices may portend more inflation relief

While the Fed’s rate hikes may be a one-sized-fits-all tool for killing demand in the economy, their intended target of elevated prices is more complex.

Following an initial supply shock, a spike in energy prices prolonged inflation and challenged the view that higher prices were simply a temporary effect of the pandemic.

But recent dips in the price of crude oil are offering more hope for relief, independent of policy responses.

“Wholesale gasoline prices imply a 12-percent decline in retail gasoline prices in coming days and weeks,” Joseph Brusuelas, chief economist with RSM management consulting, commented online Thursday.

“This will bolster disposable incomes [and] spending and indicates further disinflation moving through the economy. This supports our call of no further rate hikes and a Fed pivot to focus on stabilizing real long term rates,” he wrote.

Energy prices in the consumer price index (CPI) have been trending up since May, while the core CPI, which exempts food and energy prices, have been falling fairly steadily over the past year.

Student loan payments could deflate any major gains

Another wild card is the resumption of student loan payments, which have been on hold since the beginning of the coronavirus pandemic in 2020 and are set to take a bite out of disposable incomes starting this month, even as falling energy prices began providing breathing room.

Total U.S. student debt totaled $1.6 trillion in the first quarter of this year, according to a Federal Reserve survey of household debt levels.

An effort by the Biden administration to cancel around $430 billion of student debt was blocked by the Supreme Court earlier this year.

“This will be a major financial shock and additional burden to younger renters or millennials, especially those in the low- and moderate-income group who are rent burdened,” economists with Moody’s Analytics wrote in a July report.

Wisdom Cole, director of the National Association for the Advancement of Colored People’s (NAACP) Youth and College Division, told The Hill the nation’s student debt burden will disproportionately affect the Black community.

“Recognizing that white families have eight times more wealth than Black families, recognizing that Black borrowers have to take out a lot more student debt and hold onto it for a lot longer … the interest that incurs upon our student debt is what’s killing us,” he said in an interview in August. “We must push and continue this fight to cancel student debt.”

More strikes pop off amid surging labor unrest 

President Biden became the first U.S. president to join striking workers on a major picket line when he showed up in Michigan last month to support the United Auto Workers (UAW) in their strike at Ford, General Motors and Stellantis.

That momentum in labor activity carried into this week as 75,000 workers for Kaiser Permanente went on a three-day strike in multiple U.S. states.

Nathan Selzer, communications director with the Service Employees International Union-United Healthcare Workers West (SEIU-UHW), told The Hill Thursday the strike is still only slated to last three days.

“For now, it is a three-day strike. We’re awaiting Kaiser’s response on some of the thorniest issues of this contract. So we’re going to come back and negotiate some more and hopefully reach a settlement, so we can end the Kaiser short-staffing crisis,” he said.

The United Nations in an economic report released this week noted that the fiscal and quantitative responses to the pandemic have generally been less favorable to workers than investors.

“The effects of anti-inflation policies in advanced economies have been skewed, with the benefits accruing mostly to owners of financial assets and the costs mostly borne by wage earners and recipients of transfers everywhere,” U.N. economists wrote.

“Only as inflation started slowing in the third quarter of 2022 did real wages and salaries begin to recover, although remaining far below previous levels,” they wrote of the situation in the U.S.

Markets wobble amidst leadership vacuum in the House

The swift ouster this week of House Speaker Kevin McCarthy (R-Calif.) gave new weight to a downgrade of the U.S. default rating made over the summer made by ratings agency Fitch, which cited “an erosion of governance.” 

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch wrote in August.

McCarthy’s precedent-setting removal was prompted by yet another narrowly avoided government shutdown, following an earlier last-minute deal reached in June to stop a default on public debt.

Markets have been responding with their own malaise. The Dow Jones Industrial Average of big U.S. stocks is down 50 points on the week, 1,000 points on the month, and is about even on the year.

Treasury yields are way up on the uncertainty, with the 10-year note returning 4.78 percent, the highest level since 2007.

U.S./China trade returns to its pre-pandemic peak

Despite fears of a slowdown in China, economists noted this week that trade between the U.S. and China has rebounded, reaching record highs. Cheap Chinese imports to the U.S. are one of the underlying reasons that inflation stayed so low in the decade prior to the pandemic.

“A paradox of the current trade dispute between the world’s two largest economies is that total imports of goods to the United States from China have returned to their pre-COVID-19 peak,” U.N. economists wrote in their 2023 trade and development report.

“This is due to the sharp increase in products not subject to tariffs. Bilateral imports of both goods and services from China to the United States reached the highest level ever recorded, at $564 billion in 2022, as services continue to expand. The United States remains by far the main destination for exports of merchandise from China.”