The US labor market is weakening just as the Federal Reserve wants.
Job growth is slowing, wage growth is slowing, and the number of hours workers are actually putting in is decreasing. With inflation falling fast, it’s time for the Fed to step back and let the economy slide for the soft landing everyone wants.
Latest news: The US added 223,000 jobs in December. Wage growth is slowing in a sign of easing inflationary pressures
Unfortunately, the Fed thinks it can’t. It cannot show any weakness. He finds himself trapped because his policies are based on perceptions of power rather than real victories on the economic battlefield.
Markets do the job of the Fed
The slowdown in the economy was largely driven by financial markets driving TMUBMUSD10Y bond yields.
higher and stock prices SPX,
DJIA,
down. But if the financial markets believed the Fed was wavering, then stocks and bonds would rise and all the good work the Fed had done in controlling inflation would be lost.
Weaker financial conditions are a recipe for more inflation. Or so the thinking goes at the Marriner Eccles Building.
William Watts: The Fed’s message to the stock market: Big rallies will only prolong the painful inflation battle
The Fed expressed fear that inflation could remain stubbornly high if wages rise rapidly. The Fed believes that these higher wages will increase demand for goods and services and raise prices.
Good news in the job report
Those fears should be allayed by data released on Friday.
Average hourly wages rose 0.3% (or 3.5% annually). Hourly wages rose 4.1% annually in the past three months, down from 5.9% at the start of 2022. If worker productivity increases by the usual percentage or two, then inflation is not the way to increase wages, or so the market believes.
While hourly wages are important, what matters to both working families and the Fed is the weekly wage, which is determined by the hourly rate and the number of hours worked. Average hours worked recently fell to just 34.3 hours from 34.8 hours at the start of 2022, below the long-term average.
Private sector companies added 220,000 workers in December, but the total number of hours worked in the private sector fell 1.1% year-on-year, the second straight decline. This is a key driver of growth, as output depends in part on the total effort of workers.
Total wages paid to private-sector workers rose 2.1% year-on-year in December, about half the usual increase before the pandemic. In the last three months, the total wage bill increased by 3.7% annually, down from 9.1% at the beginning of the year. From an inflation perspective, this may be the most revealing statistic in the jobs report.
Demand does not grow faster than supply
What do all these numbers mean? Simply put, the effective demand of working families is not growing faster than the supply of goods and services.
This means that inflationary pressures from salaries are not increasing, but decreasing. That means the Fed has — at least for now — met its goal of preventing the wage-price spiral that keeps inflation unacceptably high.
Unfortunately, the Fed can’t publicly admit what’s going on. He fears that any acknowledgment of success will only encourage stock market bulls. The Fed fears that the exuberance on Wall Street will slow down the economy too much and allow inflation to spiral out of control again.
The Fed is fighting the ultimate war. In 2021, he made the mistake of thinking that inflation was “transient”. By thinking that inflation is permanent in 2023, it misleads inflation in the other direction.
It is not.
When conditions change, smart politicians have the wisdom to change their minds.
Rex Nutting has been a columnist for MarketWatch, reporting and analyzing the economy for more than 25 years.
More on inflation
The Fed should hold off on rate hikes as inflation slows significantly. But it won’t happen.
Bigger paychecks are good news for America’s working families. Why scare the Fed?
What NASA knows about soft landings that the Federal Reserve doesn’t