Friday’s jobs report showed a slowing pace of wage growth even as employment levels climbed back up to a 50-year high — a sign that the Fed is breaking the back of inflation and that consumer prices will continue their five-month downward slide.
Next week’s consumer price index will give a clearer picture of where the economy is heading in 2023, but Friday’s job numbers indicate that the Fed’s goal of a “soft landing” — lower prices without a major recession — may be within reach.
While most economists are still predicting a recession in 2023, many sounded positive notes on Friday. Expectations set last year that only a serious economic downturn with mass unemployment would be able to tame prices seem to be diminishing.
“Let me draw a line under today’s jobs report: Rapid job growth, record low unemployment, and wage growth running at levels likely to cool inflation is an astonishing trifecta of good news,” Justin Wolfers, an economist at the University of Michigan, wrote online Friday.
“With this report, it is clear the labor market is slowing, but not at a rapid pace. The cyclical storm clouds of possible recession looming on the horizon are a little bit less daunting than they were yesterday,” economist Aaron Terrazas of jobs website Glassdoor said in an analysis. “Looking forward, we should probably be a little bit less afraid of 2023.”
Wage growth is cooling
Hourly wages in December increased 4.6 percent on the year and 0.3 percent from last month, coming in lower than expectations of 5 percent and 0.4 percent. December’s numbers are down from a 5.1 percent annual increase reported in November and a 0.6 percent increase from October.
That slowing pace of wage growth is good news for inflation, because labor costs are generally around 70 percent of the price of consumer goods. Easing wage growth means less pressure on prices.
“There is still an issue that wages may be growing too rapidly to allow inflation to fall back to its pre-pandemic rate. The jury is still out here, but if we see some gradual slowing of wages, we can get a story where the labor market remains strong and inflation continues to fall back to pre-pandemic rates,” economist Dean Baker of the Center for Economic Policy and Research wrote in an email to The Hill.
However, wage growth isn’t the only cause of inflation, and many economists have been pointing to higher profits and markups in the private sector as the key driver.
“Today’s inflation is more about margin expansion than labor costs,” UBS economist Paul Donovan wrote in December, noting that slowing labor-cost growth underscored “how little of the current inflation is labor related.”
“Between 2020 and 2022, an estimated 54 percent of the average price increase in the United States non-financial sector was attributable to higher profit margins, compared to only 11 percent in the previous 40 years,” a recent report from the United Nations Conference on Trade and Development found.
The workforce may be growing again
The unemployment rate fell again to its lowest level in 50 years at 3.5 percent of the workforce, Friday’s job report showed, indicating high demand for workers and a lower probability of recession.
Perhaps more importantly, the report also showed that the U.S. workforce may be growing in size. The employment-population ratio ticked up in December to 60.1 percent of working age people, from 59.9 percent in November.
“The latest [Bureau of Labor Statistics] jobs report is encouraging, showing an increase in labor force participation. The labor force grew by 439,000 in December after declining for three straight months, but we are still missing 2.95 million workers,” the U.S. Chamber of Commerce wrote in a statement online.
“With the unemployment rate moving back down to the historic low of 3.5 percent, workers get a measure of reassurance regarding job security. With 223,000 jobs added to payrolls, the job market remains remarkably resilient,” Mark Hamrick of Bankrate wrote in an analysis.
Since last June, consumer inflation has dropped 2 whole percentage points, indicating that a persistently strong job market — which has been at or below 4 percent since the end of 2021 — may not be the primary driver of inflation.
That’s a far cry from some of the discouraging analyses, circulating among policymakers last year, that required mass unemployment to achieve lower prices.
“We need five years of unemployment above 5 percent to contain inflation. In other words, we need two years of 7.5 percent unemployment or 5 years of 6 percent unemployment, or one year of 10 percent unemployment,” former U.S. Treasury Secretary Lawrence Summers said at a speech in London last year.
High-need industries are gaining jobs quickly
Some of the biggest December job gains came in areas of the economy that are either well below their pre-pandemic employment totals or still struggling to catch up to intense consumer demand.
Leisure and hospitality led all other industries in December with a gain of 67,000 jobs amid a rush of holiday shopping and travel, but remains 932,000 jobs behind its February 2020 level.
The health care sector also added 55,000 jobs, with 30,000 added in doctors’ offices and outpatient care centers alone. While employment in health care is well above pre-pandemic levels, the sector has still suffered from a labor shortage as Americans seek care they put off during the depths of the pandemic.
“Nearly half of the headline gain came from a strong rebound in health care employment — perhaps signaling some easing in the supply strains. Leisure and hospitality job gains were also robust while white-collar jobs suffered with a pullback in professional business services,” wrote Gregory Daco, chief economist at EY Parthenon, in a Friday analysis.
Fed on track to keep hiking rates
The slight December slowdown in job gains and wage growth may be a sign of the Fed’s rate hikes working, but it won’t be enough to keep the bank from hiking them again later this month.
Experts say that while the economy and the inflation rate are showing clear signs of slowing, neither have weakened enough to warrant a change in the Fed’s plans.
“A 3.5 percent unemployment rate, a 4.6 percent increase in wages and a still-hot overall labor market do not denote a deceleration in overall economic activity, nor an increase in labor slack that will restore the price stability that the Federal Reserve is trying to achieve,” said Joe Brusuelas, chief economist at audit and tax firm RSM, in a Friday analysis.
The Fed is expected to hike its baseline interest rate range by at least another 0.5 percentage points before the second half of the year, and could issue a hike of that size at the end of its next policy meeting on Feb. 1.
Brusuelas, however, said the December drop-off in job gains and slower wage growth could prompt the Fed to spread out rate increases across meetings instead of a single hike in February.
“The Fed may choose to slow its pace of rate hikes next month, perhaps to 25 basis points from the 50 basis-point increase in December,” he said.
Even a slower month is still strong
If the fears of some experts come true and the U.S. economy does hit a recession this year, it probably hasn’t started yet.
While the December employment increase was lowest since the onset of the pandemic in 2020, it was also better than the average monthly job gain in the two years preceding the pandemic. The 3.5 percent unemployment rate in December was also even with its level in February 2020, which was the lowest unemployment rate in almost 50 years.
“The most encouraging takeaway here is that the Fed is threading the needle between slowing and crashing the economy. With numbers like these, it’s safe to say we aren’t in a recession yet,” said Callie Cox, investment analyst at online investing platform eToro, in a Friday analysis.
“For now, it’s a good sign that the Fed hasn’t broken the economy yet. The best-case scenario is a soft landing, and it’s still in play. But the Fed needs to be careful,” Cox said.