The Department of Labor’s December jobs report brought good news on the 223,000 nationally added jobs and a slightly lower unemployment rate. Best of all, for inflation fighters, although maybe not for workers who hope to get ahead of inflation, there was a 4.6% gain in wages, the smallest since mid-2021.
The good news interpretation of the smaller wage gains stems from watchers who hope the Federal Reserve goes for an increase of 25 basis points at the February meeting instead of another 50-point blow. In reaction to the report, the S&P 500 index headed skyward. Indeed, the response was so positive that some suggested Goldilocks had risen from the dead, things might turn just right, and the economy might avoid a 2023 recession after all.
ECONOMIC ‘SOFT LANDING’ LOOKING LIKELIER AS INFLATION EASES AND EMPLOYMENT GROWS
When the Fed figuratively hits the brakes, credit tightens, lending heads south, and growth in bank deposits turns pale. Consumers cut back on spending, and employers stop hiring as many workers. Less money is chasing the same goods, and inflation falls. How this relates to employment is shown in the following chart.
The increase in job openings accelerated in 2021, when large amounts of stimulus money were flowing to consumers and the Fed was easing. Growth slowed down in 2022 when the Fed began applying the brakes.
But real action comes when firms actually hire people and employment responds. This is what the “Total Employment” line shows. Employment growth jumped in June 2021, then fell and grew at an almost constant rate from that point forward, giving a flat growth trajectory that looks very much like job growth in 2019 and 2020. The two lines together — “Job Openings” and “Total Employment” — tell us that employers are now taking down their job opening signs but holding on to their employees. As the signs go down, we may hear the three recessionary bears growling in the distance. But as employment holds steady, Goldilocks may still feel just right.
There is another action firms can take when dealing with a stop-and-go economy. Employers can add and discharge temporary workers. This is seen in the line marked “Temps.” Note the explosive growth that occurred around June 2021 and the sharp growth decline that has occurred since June 2022. Also note that in the current period, temporary hires are falling.
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What does all this say about the outlook? Employment growth is holding up, employers are hedging their bets by laying off temporaries, and “help wanted” signs are coming down. The economy is surely slowing, but there is a possibility that employment growth will not turn negative unless the Fed persists with heavy half-point increases in interest rates over the next few months.
Yes, Goldilocks may still have a chance, but it is a slim one.
