New jobs report is encouraging on jobs and inflation
The White House was quick to highlight the May jobs numbers the Labor Department released on Friday, and for good reason. Despite widespread rumors of recession fears on Wall Street and in the media, the economy added 390,000 jobs in May and the unemployment rate remained low and stable at 3.6%. The employment figure was higher than expected by economists and indicates that the strong economic recovery from the pandemic is continuing. There was also reassuring news on the inflation front: wage inflation, a major component of price inflation, declined last month.
Since March, the economy has added an average of four hundred and eight thousand jobs per month. That’s a significant slowdown from the average figure of almost six hundred thousand over the previous six months, but it’s still a very healthy number. Between 2011 and 2019, job growth averaged 194,000 per month, the White House Council of Economic Advisers pointed out in a blog post on Friday. The current rate of job creation is more than double the pre-pandemic rate. So much for the Republican suggestions that the economy is already on the brink of the doldrums.
The jobs report also showed average hourly earnings rose 5.2% in the past twelve months to May, slowing from a previous rate of 5.5%. And, if you annualize the numbers for the last three months only, hourly earnings have increased at a rate of about 4.5%. From the workers’ point of view, this decline is not necessarily good news: it means that their wages still fail to keep up with the prices of goods and services, which rose by 8.3% in the twelve months preceding april. But, from the perspective of a Federal Reserve determined to rein in inflation, the new jobs report contains encouraging signs that wage inflation is not out of control and, in fact, is already moving. in the right direction.
“After four consecutive readings below the previous trend, we are now confident enough to say that the underlying pace of wage growth is moderating,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to the media. clients. Changes in the composition of the workforce can sometimes skew readings of wage inflation, but this does not appear to be happening currently. On a composition-adjusted basis, the year-over-year rise in average hourly earnings also fell, from 5.6% in April to 5.3% in May, Karen Dynan, of the Peterson Institute for International Economics, and Wilson Powell III of Harvard. University, pointed out in a blog post.
In another encouraging sign, more Americans who have stopped working or looking for work during the pandemic appear to be returning to the workforce. In May, the labor force participation rate increased slightly, and since December, the labor force has increased by 2.1 million people. If it continues to grow in this way – there is room for further growth as the labor force participation rate remains well below its pre-pandemic level – it should further reduce wage pressures.
Even so, with high inflation and soaring energy prices, the economy still faces serious challenges, but not an immediate recession or a 1970s-style price-wage spiral. The challenge facing the Fed is not just to stop inflation, but to bring it back towards the 2% target set by central banks. Many economists said the strong jobs numbers would persuade the Fed that it needed to keep raising interest rates to further slow the pace of hiring, a policy that carries significant economic risks. This explains how Wall Street interpreted the jobs report. Stock prices fell on Friday, with the Dow Jones falling about 1% and the Nasdaq about 2.5%.
The fact that positive jobs news triggered a further sell-off in the market reflects the particular economic environment in which we live. It is an environment in which Americans, as workers, have rarely had so many job opportunities. Government figures indicate that there are almost two vacancies for every person. looking for a job, but Americans, as consumers, face sticker shock every time they go to the gas station or the supermarket. (Inflation is over 8% and, according to AAA, the average price of a gallon of gas across the country has hit a new high of $4.76.)
Speaking to reporters after the jobs figures were released, Joe Biden was careful to acknowledge this disjunction. “I know that even with the good news today, a lot of Americans are still anxious, and I understand that feeling,” he said. “There’s no denying that high prices, especially around gas and food, are a real problem for people.” Only after acknowledging this did the president outline some of the positive developments, including the 8.7 million jobs the economy has created since he took office, a record for any term. presidential. “Because of the tremendous progress we’ve made on the economy, Americans can fight inflation from a position of strength,” Biden said.
The president deserves more credit for a growing economy than he gets, but public attitudes are unlikely to change until there are signs of progress on inflation. This explains Biden’s announced desire to meet Saudi Crown Prince Mohammed bin Salman soon. As the European Union this week announced a gradual embargo on Russian oil, Western governments, including Washington, are counting on the Saudis to pump in more crude oil to offset Russia’s shortfall in world markets and avoid a new price spike. Therefore, Biden, like many presidents before him, is expected to visit Riyadh.
There are limits to what any president can do to fight headline inflation. In the US system, this responsibility falls primarily on the Fed. The new jobs report suggests that Fed Chairman Jay Powell’s hope for a ‘soft or soft landing’ for the economy isn’t necessarily hopeless, but the story of the inflation still has a long way to go. Next up: the Consumer Price Index figures for May, which will be released next Friday. At the Fed and the White House, he will be eagerly awaited.