The US job market is remarkably strong, a report on Friday showed, with the lowest unemployment rate in half a century, rapidly rising wages and breakneck hiring rates at companies.
But the good news could later become a problem for President Biden.
Mr. Biden and his associates pointed to the hiring frenzy as proof the United States is not in a recession and celebrated the report showing those employers added 528,000 jobs in July and pay increased 5.2 percent from a year earlier. But the still rapid pace of hiring and wage growth means the Federal Reserve may need to act more decisively to contain the economy while trying to get inflation under control.
Fed officials have been waiting for signs that the economy, and particularly the job market, is slowing. They hope that the supply of available applicants will match employers’ insatiable labor needs, which would take the pressure off wages and, in turn, pave the way for businesses like restaurants, hotels and retailers to dampen price increases.
Moderation has remained elusive, and that could prompt central bankers to raise interest rates quickly to cool the economy and stem the fastest inflation in four decades. If the Fed adjusts policy aggressively, it could increase the risk of the economy tipping into recession rather than gently inching into the so-called soft landing that central bankers have been trying to engineer.
“We’re very unlikely to enter a recession in the short term,” said Michael Gapen, Bank of America’s head of U.S. economic research. “But I would also say that numbers like these increase the risk of a sharper landing down the road.”
Interest rates are a blunt instrument, and historically, large Fed adjustments have often triggered recessions. Share prices fell after Friday’s release, a sign investors are concerned the new numbers increase the likelihood of poor economic results across the board.
Even as investors focused on the risks, the White House hailed the jobs data as good news and a clear sign the economy is not in recession, although gross domestic product growth has stalled this year.
“From the president’s perspective, a convincing job report is always very welcome,” Jared Bernstein, a member of the White House Economic Advisory Council, said in an interview. “And that’s a very strong job report.”
Still, the report seemed to undermine the government’s view of where the economy is headed. Mr. Biden and White House officials have been arguing for months that job growth would soon slow. They said a slowdown is a welcome sign of the economy transitioning to more sustainable growth with lower inflation.
The lack of such a slowdown could be a sign of more stubborn inflation than government economists had hoped, although White House officials gave no indication on Friday that they were concerned.
“We think it’s good news for the American people,” White House press secretary Karine Jean-Pierre told reporters at a briefing. “We believe we are still moving towards a transition to more steady and stable growth.”
The state of jobs in the United States
Job gains in July, which far exceeded expectations, show the job market is not slowing down despite the Federal Reserve’s efforts to cool the economy.
The Fed had also expected a slowdown. Ahead of the July jobs report, a variety of other data points had suggested the labor market was slowing: wage growth had moderated fairly steadily; Vacancies, while still high, were falling; and unemployment claims, though low, had increased.
The Fed had welcomed this development – but the new numbers called moderation into question. Average hourly wages have been rising steadily on a monthly basis since April and Friday’s report capped a hiring wave, meaning the job market has now returned to its pre-pandemic size.
“Reports like this underscore how much more the Fed needs to do to bring down inflation,” said Blerina Uruci, US economist at T. Rowe Price. “The labor market remains very hot.”
Central bankers have hiked borrowing costs by three-quarters of a percentage point in each of their last two meetings, an unusually fast pace. Officials had hinted they could raise rates by half a point at their September meeting, but that forecast hinged in part on their expectation that the economy would cool significantly.
Instead, “I think this report makes a three-quarters point on the baseline,” said Oair Sharif, founder of Inflation Insights, a research firm. “The labor market is still raging, so this isn’t the kind of slowdown the Fed is trying to create to ease price pressures.”
Fed policymakers usually welcome strong hiring and robust wage growth, but wages have been rising so fast lately that they could make it difficult to rein in inflation. When employers pay more, they either have to charge their customers more, increase their productivity, or eat into their profits. Price increases are usually the easiest and most practical way.
And as inflation has skyrocketed, even robust wage growth hasn’t kept up for most people. While wages have risen 5.2 percent over the past year, far faster than the 2 to 3 percent gains usual before the pandemic, consumer prices rose 9.1 percent over the year to June.
Fed officials are trying to steer the economy back to a place where both wage growth and inflation are slower, in the hope that workers can earn wage increases that will benefit them in a sustainable way once prices start to rise again.
“Ultimately, when you think about the medium and longer term, price stability is what keeps the entire economy going,” Fed Chairman Jerome H. Powell said at his July news conference, explaining the rationale.
Some prominent Democrats have questioned whether the United States should rely so heavily on Fed policy – which works by hurting the job market – to cool inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, were among those arguing that there must be a better way.
But most changes Congress and the White House can enact to bring down inflation would take time to play out. Economists estimate that the Biden administration’s climate and tax bill, the Inflation Reduction Act, would have a small impact on price increases in the short term, although it could help more over time.
While the White House has avoided saying what the Fed should do, Mr Bernstein of the Council of Economic Advisers suggested Friday’s report could give the Fed more cushion to hike rates without hurting workers .
“The strong strength in this labor market is not just a buffer for working families,” he said. “It also gives the Fed room to do what it needs to do while trying to maintain a strong labor market.”
Still, the central bank could find itself in an awkward position in the coming months.
An inflation report, due to be released on Wednesday, is expected to show that consumer price inflation eased in July as gas prices fell. But fuel prices are volatile, and other signs that inflation is getting out of hand are likely to remain: rents are rising fast and many services are becoming more expensive.
And the still hot labor market is likely to reinforce the view that conditions are not falling fast enough. That could prevent the Fed from containing economic activity even if headline inflation shows early and perhaps temporary signs of a slowdown.
“We will slow down inflation over the next few months,” Mr Sharif said. “The activity part of the equation is currently not cooperating, even if overall inflation cools.”
Isabella Simonetti contributed to the coverage.