The markets are awaiting the crucial August jobs report in the overhang of Fed determination to tame inflation even at the cost of damaging the economy as hinted by Fed Chair Jerome Powell and other officials
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
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.
The August jobs report will be issued at 8:30 a.m. Eastern
time.
A weaker pace of hiring should help moderate wage increases
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.
Labor costs passed on
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
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.
Repeated rate increases
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.
normal">  |
text-align:center;line-height:normal">Source: U.S. Bureau of Labor Statistics |
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
workingor 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.
Low worker productivity
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
centralbank 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.
Housing market hit
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
Rugaber is AP Economics Writer)
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USinflation jumps to 9.1%, highest rate since 1981 as consumer pressures
intensify
