On the window of an IN-N-OUT fast food restaurant in Encinitas, California on April 9.
Mike Blake | Portal
Strong job growth in December combined with slowing wage inflation is fueling optimism that the economy could only see a soft landing.
However, economists are divided on whether that will be the case, as a strong labor market could continue to trigger service sector price hikes and lead the Federal Reserve to hike interest rates. These higher interest rates could slow down the economy further and push it into a recession.
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The economy added 223,000 jobs in the last month of 2022, down from November’s 256,000, according to the Bureau of Labor Statistics. Unemployment fell to 3.469%, the lowest since 1969, according to economists.
Meanwhile, average hourly wages rose 4.6% on an annualized basis, less than the 5% expected by economists. On a monthly basis, that was a gain of 0.3% compared to Dow Jones expectations of 0.4%. Wage growth in November was revised down to a monthly gain of 0.4% from a previously reported 0.6%.
“This could be the last hurrah. It’s about as close to a Goldilocks number as the Fed can hope for at this point,” said Diane Swonk, KPMG’s chief economist. “They had a slowdown in wage growth with an increase in labor force participation and a fall in the unemployment rate. They hit it on all three grades.”
Stocks rallied after the report and government bond yields – which move inversely to price – fell. Economists polled by Dow Jones expected 200,000 new jobs to be added this month and that the pace of job creation will continue to slow sharply.
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Consumer inflation has come down. Economists polled by Dow Jones expect the consumer price index to rise 6.5% on an annualized basis in December, compared to 7.1% in November. The December CPI is scheduled to be released on January 12th.
“What the Fed is looking at is they’re getting into the trickiest part of inflation now, and that’s wages, and the market sees the trend is in the right direction,” Swonk said.
Swonk said she expects job growth to slow further and the economy to fall into a shallow recession. Nevertheless, the image of the labor market is one of the strongest ever.
“We have 4.5 million new payslips for the year. It’s the second strongest year on record,” Swonk said. She said 2022 is the second year after 2021, when 6.7 million jobs were created. “The only thing close was 1946, when the soldiers returned to civilian work after World War II.”
Mark Zandi, chief economist at Moody’s Analytics, said the report was encouraging and confirmed his expectation that there would be a soft landing for the economy. “It was as perfect a report as one could wish for,” he said. “I don’t think there were any blemishes in the report. It shows a job market that is slowly but surely cooling off.”
While many economists are expecting a recession, Zandi points to strong growth even as the real estate sector slows. According to the Atlanta Fed, gross domestic product grew at a strong rate of 3.8% in the fourth quarter of 2022. Zandi notes that wage growth is a full percentage point slower than at its spring peak.
“This is consistent with the Fed threading the needle of slowing growth enough to slow inflation but not pushing the economy into recession,” Zandi said. “We call it a ‘slowcession’.”
The decline in unemployment came as the labor force participation rate rose slightly to 62.3%. That’s still a full percentage point down from February 2020, the month before the outbreak of the Covid-19 pandemic.
“It’s one thing to say labor market momentum is slowing, but it’s another to say imbalances are being eliminated,” said Michael Gapen, Bank of America’s chief US economist.
“There is something for everyone in the report”
The Federal Reserve has hoped to curb inflation by raising interest rates enough to cool the economy, and that would be done through the labor market. But with policy rates at 4.25% to 4.50%, the Fed has targeted further rate hikes until it hits its 5.1% forecast for the closing or final rate.
Gapen and other economists expect the Fed to hike rates by half a percentage point on Feb. 1, while futures traders expect only a quarter-point hike. Gapen said the strong jobs report supported his rate hike forecast.
“There’s something for everyone in this report, but when I look at it and say ‘soft landing,’ I don’t agree,” Gapen said. “Unemployment rate is falling and wage growth is at 223k. The Fed wants it below 100k, probably closer to 80k.”
He expects negative employment growth following the Fed’s rate hikes this year. There have been seven rate hikes since March. “Here we are nine months later and you’re still adding in spots that would count as the blowout rate in a normal recovery,” he said.
Gapen notes that there were still a surprisingly high 10.5 million job openings in November, according to the Job Openings and Labor Turnover Survey released Wednesday.
“From the perspective of an unemployed worker looking for jobs, it’s still a very good report and it’s still a very good job market,” Gapen said. “If you’re a policymaker, things will remain so stubborn that you won’t be able to fulfill your inflationary mandate.”