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WASHINGTON (AP) — Raging inflation has so scrambled the economy that it’s come to this: If Friday’s jobs report for August were to show a significant hiring slowdown, the Federal Reserve — and even the White House — would likely welcome it.
The
government is expected to report that employers added 300,000 jobs last month,
according to a survey of economists by the data provider FactSet. That would be
down from a blockbuster gain of 528,000 in July and an average of about 440,000
over the past three months. The unemployment rate is expected to remain at
3.5%, FactSet says, matching a half-century low.
A weaker
pace of hiring should help moderate wage increases and lift hopes that
inflation pressures are starting to ease. That, in turn, would help the Fed
make progress toward its goal of conquering high inflation, which is near a
four-decade high.
Many
companies pass along their higher labor costs to customers through price
increases. Conversely, when wages rise more slowly, businesses have less need
to raise prices.
Chair Jerome
Powell and other Fed officials have increasingly stressed their determination
to tame inflation even at the cost of damaging the economy. In a major speech
in Jackson Hole, Wyoming last week, Powell underscored the Fed’s tight focus on
curbing inflation and said he was prepared to continue raising short-term
interest rates and keep them elevated to achieve that goal. He warned that the
Fed’s inflation fight would likely cause pain for Americans in the form of a
weaker economy and job losses.
The stock market
has fallen every day since that speech as fears that the Fed may cause a
recession have escalated.
Powell also
said the job market is “clearly out of balance,” with demand for workers
“substantially exceeding” the available supply. Indeed, the government reported
this week that the number of available jobs rose in July to a near-record high,
after three months of declines. There are roughly two open jobs for every
unemployed worker, a sign that many companies are still desperate to hire and
may keep raising wages to do so.
“I don’t
think the Fed is rooting for a poor jobs report, but they are certainly not
rooting for a repeat of July,” when hiring accelerated and wage increases were
strong, said Gregory Daco, chief economist at Parthenon-EY. “They are going to
want to see some moderation.”
The central
bank has raised its short-term rate to a range of 2.25% to 2.5% this year,
after the fastest series of increases since it began using its short-term rate
to influence the economy in the early 1990s. It has projected that its key rate
will reach a range of 3.25% to 3.5% by year’s end. Those rate hikes have made
borrowing and spending steadily more expensive for individuals and businesses.
The housing market, in particular, has been weakened by higher loan rates.
If Friday’s
jobs report is another strong one, with substantial hiring and rapid wage
growth, the Fed could opt to announce another sizable three-quarter-point hike
when it meets later this month, after similar rate increases in June and July.
The jobs
figures will also help fill out the economic backdrop as this fall’s
congressional elections intensify. Republicans have pointed to high inflation
to try to pummel Democrats in midterm campaigns. The Biden administration has
pushed back and claimed credit for a robust pace of job growth.
Karine
Jean-Pierre, the White House press secretary, told reporters this week that
“we’re expecting job numbers to cool off a bit.” The administration has been
saying for months that it expects the economy to move to slower but
still-steady growth after a swift economic rebound from the pandemic that came
with a burst of inflation.
Wages are
rising at the fastest pace in decades as employers scramble to fill jobs at a
time when fewer Americans are working or seeking work in the aftermath of the
pandemic. Average hourly pay jumped 5.2% in July from a year earlier. Still,
that was less than the 5.6% year-over-year in March, which was the largest
annual increase in 15 years of records outside of the spring of 2020, when the
pandemic struck.
Higher wages
aren’t necessarily inflationary if they are accompanied by greater efficiencies
— if, for example, workers use machines or technology to produce more output.
But worker efficiency, or productivity, has tumbled in the past year.
Loretta
Mester, president of the Federal Reserve Bank of Cleveland, said Wednesday that
“current wage increases are not consistent with inflation returning to our 2%
goal” and that she thought with worker productivity so low, wage growth would
have to slow to 3.5% or so to reduce inflation.
Yet some
skeptics warn that the Fed may be focusing excessively on the strength of the
job market when other indicators indicate that the economy is noticeably
weakening. Consumer spending, for example, and manufacturing have slowed. The
central bank might raise rates too far as a result, to the point where it causes
a deeper recession than might be needed to conquer inflation.
“They run a
risk of not realizing how much those rate hikes are restraining economic
growth, if they’re just looking at the really strong employment gains,” said
Jonathan Pingle, chief U.S. economist at Swiss bank UBS. “You could end up
risking over tightening or moving too fast, too soon.”
The economic
picture is highly uncertain, with the healthy pace of hiring and low
unemployment at odds with the government’s estimate that the economy shrank in
the first six months of this year, which is one informal definition of a
recession.
Yet a
related measure of the economy’s growth, which focuses on incomes, shows that
it is still expanding, if at a weak pace.
So far, the
Fed’s rate hikes have severely dented the housing market. With the average rate
on a thirty-year mortgage reaching 5.66% last week — double the level of a year
ago — sales of existing homes have fallen for six straight months.
Consumers
have moderated their spending in the face of much higher prices, though they
spent more in July even after adjusting for inflation. But companies’
investment in new equipment has slowed, indicating they have an increasingly cautious
outlook on the economy.
AP Writer
Josh Boak contributed to this report.