The New Jobs Report Is Encouraging on Jobs and Inflation


The White House was quick to highlight the May jobs figures that the Labor Department released on Friday, and for good reason. Despite widespread talk of recession fears on Wall Street and in the media, the economy added three hundred and ninety thousand jobs in May, and the unemployment rate held low and steady at 3.6 per cent. The jobs figure was higher than economists were expecting, and it indicates that the vigorous economic recovery from the pandemic continues. There was also reassuring news on the inflation front: wage inflation—a major component of price inflation—nudged down 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 nearly six hundred thousand during the previous six months, but it’s still a very healthy number. Between 2011 and 2019, job growth averaged a hundred and ninety-four thousand a month, the White House’s Council of Economic Advisers pointed out in a blog post on Friday. The current rate of job creation is more than twice that pre-pandemic rate. So much for Republican suggestions that the economy is already on the verge of a slump.

The employment report also showed that average hourly earnings rose by 5.2 per cent in the past twelve months to May, slowing down from a previous rate of 5.5 per cent. And, if you annualize the figures from just the past three months, hourly earnings rose at a rate of about 4.5 per cent. From the perspective of workers, this drop isn’t necessarily good news: it means their wages are still failing to keep up with the prices of goods and services, which rose by 8.3 per cent in the twelve months to April. But, from the perspective of a Federal Reserve determined to curb inflation, the new jobs report contains encouraging signs that wage inflation isn’t out of control, and is, in fact, already moving in the right direction.

“After four straight readings below the previous trend, we are now quite confident in arguing that the underlying pace of wage growth is moderating,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a note to clients. Changes in the composition of the workforce can sometimes distort wage-inflation readings, but that doesn’t seem to be happening now. On a composition-adjusted basis, the twelve-month rise in average hourly earnings also declined—from 5.6 per cent in April to 5.3 per cent 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 hopeful sign, more Americans who gave up working or looking for work during the pandemic appear to be returning to the labor market. In May, the labor-force participation rate ticked up a bit, and since December the labor force has grown by a robust 2.1 million people. If it keeps growing in this manner—there is room for further growth because the participation rate remains well below its pre-pandemic level—that should further reduce wage pressures.

Even so, with inflation elevated and energy prices soaring, the economy still faces serious challenges, but not an immediate recession or a nineteen-seventies-style wage-price spiral. The challenge facing the Fed is not just to arrest inflation but to bring it down toward the central banks’ goal of two per cent. Many economists said the strong job figures would persuade the Fed that it needs to keep ramping up interest rates to further slow the pace of hiring—a policy that entails significant economic risks. That explains how Wall Street interpreted the jobs report. Stock prices slipped on Friday, with the Dow falling about one per cent and the Nasdaq falling about two and a half per cent.

The fact that positive jobs news sparked another sell-off in the market reflects the peculiar economic environment we live in. It’s an environment in which Americans as workers have rarely had so many job opportunities—government figures indicate there are nearly two vacancies for every person looking for work—but Americans as consumers are facing sticker shock every time they go to the gas station or supermarket. (Inflation is running at more than eight per cent, and, according to A.A.A., the average price of a gallon of gasoline across the country has risen to a new high of $4.76.)

Speaking with reporters after the job figures came out, Joe Biden was careful to acknowledge this disjuncture. “I know that, even with today’s good news, a lot of Americans remain anxious, and I understand the feeling,” he said. “There is no denying that high prices, particularly around gasoline and food, are a real problem for people.” Only after recognizing this did the President describe some of the positive developments, including the 8.7 million jobs the economy has created since he took office—a record for any Presidential term. “Because of the enormous progress we’ve made on the economy, the Americans can tackle inflation from a position of strength,” Biden said.

The President deserves more credit for a growing economy than he’s getting, but public attitudes likely won’t change until there are signs of progress on inflation. This explains Biden’s reported willingness to soon meet with the Saudi crown prince Mohammed bin Salman. With the European Union announcing a phased embargo on Russian oil this week, western governments, Washington included, are relying on the Saudis to pump more crude oil to make up for a Russian shortfall in global markets and to avert another spike in prices. Hence Biden, like many Presidents before him, is set to go to Riyadh.

There are limits to what any President can do to tackle over-all inflation. In the U.S. system, that responsibility rests primarily with the Fed. The new employment report suggests that the Fed chair Jay Powell’s hope of achieving a “soft or softish landing” for the economy isn’t necessarily a forlorn one, but the inflation story still has a long way to run. Next up: the Consumer Price Index figures for May, which will be released next Friday. At the Fed and the White House, it will be nervously awaited.



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