Fed hopes August hiring report will show slowdown

WASHINGTON

Soaring inflation has rattled the economy so much it has come down to this: If Friday’s jobs report for August were to show a significant slowdown in hiring, the Federal Reserve – and even the White House – would probably welcome it.

The government is expected to report that employers added 300,000 jobs last month, according to a survey of economists by data provider FactSet. That would be down from a dramatic gain of 528,000 in July and an average of around 440,000 over the past three months. The jobless rate is expected to remain at 3.5%, according to FactSet, matching a half-century low.

The August jobs report will be released at 8:30 a.m. Eastern Time.

A slowdown in the pace of hiring should help moderate wage increases and raise hopes that inflationary pressures are starting to ease. That, in turn, would help the Fed move toward its goal of beating high inflation, which is near a four-decade high.

Many companies pass on their higher labor costs to their customers through price increases. Conversely, when wages increase more slowly, companies have less need to raise prices.

Chairman Jerome Powell and other Fed officials have increasingly stressed their determination to bring inflation under control, even at the cost of damaging the economy. In a major speech in Jackson Hole, Wyoming last week, Powell underscored the Fed’s focus on fighting inflation and said he was ready to continue raising short-term interest rates. term and to keep them high to achieve this goal. He warned that the Fed’s inflation fight would likely cause suffering for Americans in the form of a weaker economy and job losses.

The stock market has fallen every day since that speech as fears the Fed could trigger a recession intensified.

Powell also said the labor market was “clearly out of balance”, with the demand for workers “significantly outstripping” the available supply. Indeed, the government announced this week that the number of available jobs had increased in July to reach a near record level, after three months of decline. There are about two jobs open for every unemployed person, a sign that many companies are still desperate to hire and may continue to raise wages to do so.

“I don’t think the Fed is encouraging a bad jobs report, but they certainly don’t want a repeat of July,” said Gregory Daco, chief economist at Parthenon-EY. “They’re 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, following the fastest series of hikes since it began using its short-term rate to influence the economy in the early 1990s. It expects its key rate to reach a range of 3.25% to 3.5% by the end of the year. These rate hikes have made borrowing and spending increasingly expensive for individuals and businesses. The housing market, in particular, has been weakened by rising lending rates.

If Friday’s jobs report is another strong report, with substantial hiring and rapid wage growth, the Fed could choose to announce another big three-quarter point hike at its meeting later this month. this, after similar rate increases in June and July.

The jobs numbers will also help round out the economic backdrop as this fall’s congressional elections heat up. Republicans have pointed to high inflation in an attempt to hit Democrats during midterm campaigns. The Biden administration pushed back and claimed the steady pace of job growth.

Karine Jean-Pierre, the White House press secretary, told reporters this week that “we expect the employment numbers to cool down a bit.” The administration has said for months that it expects the economy to transition to slower but still stable growth after a rapid economic rebound from the pandemic that was accompanied by a surge in inflation.

Wages are rising at the fastest rate in decades as employers scramble to fill jobs at a time when fewer Americans are working or looking for work in the wake of the pandemic. Average hourly earnings 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 biggest annual increase in 15 years of records outside the spring of 2020, when the pandemic hit.

Higher wages are not necessarily inflationary if they are accompanied by greater efficiency – if, for example, workers use machines or technology to produce more output. But the efficiency or productivity of workers has dropped over the past year.

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% target” and that she believed that with productivity workers if weak, wage growth should slow to 3.5% or so to reduce inflation.

Still, some skeptics warn that the Fed may be overly focused on labor market strength as other indicators point to the economy weakening significantly. Consumer spending, for example, and manufacturing have slowed. The central bank could raise rates too far as a result, to the point of causing a deeper recession than needed to defeat inflation.

“They run the risk of not realizing how much these rate hikes are holding back economic growth, if they just look at the very strong job gains,” said Jonathan Pingle, chief U.S. economist at Swiss bank UBS. . “You could end up risking over-tightening or going too fast, too soon.”

The economic situation is very uncertain, with the strong pace of hiring and the low unemployment rate contradicting the government’s estimate that the economy contracted in the first six months of this year, which is an informal definition of a recession.

Yet a related measure of the economy’s growth, which focuses on income, shows it is still expanding, albeit at a slow pace.

So far, the Fed’s rate hikes have seriously shaken the real estate market. While the average rate for a 30-year mortgage hit 5.66% last week, double the level of a year ago, sales of existing homes have fallen for six straight months.

Consumers moderated their spending in the face of much higher prices, although they spent more in July even after adjusting for inflation. But business investment in new equipment has slowed, indicating they have an increasingly cautious view of the economy.

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AP Writer Josh Boak contributed to this report.