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The December jobs numbers showed a very strong US job market, easily meeting the Federal Reserve’s objective of full employment. That leaves the Fed free to focus its energies on battling inflation, where the numbers are not as encouraging.
In Focus - U.S. Employment
The December jobs release from the BLS was indisputably providing relevant information about what the Federal Reserve is likely to do in coming months and, in turn, about the likely trajectory of the US economy. But what was the message?
Markets initially seemed encouraged by what they took as a positive message, rising by more than 2% on Friday. Investors seemed particularly enthused by the limited increase in average hourly earnings, which rose by 0.3% for the month, less than the 0.4% anticipated. This seemed to suggest that inflation fears might be receding while growth and employment remained strong. What’s not to like about that?
There’s another way to interpret the same report. To pick out the relevant parts, one can start with the Fed’s dual mandate: full employment and price stability. The jobs report gave ample evidence that the first goal is being met. While the 223K net new jobs is a modest figure, the 3.5% unemployment rate is historically very low.
The unemployment rate can mislead as an indicator when there are questions about labor force participation, since people who are not seeking jobs do not count in the statistics as unemployed. There can also be questions about the effect of retirements on labor force numbers. The chart above shows an indicator that sidesteps both difficulties. It shows the ratio of employment to population for ages 25-54. In December, that figure was a very strong 80.1.
The chart shows the last 20 years of data. The latest December number was in the top 6% of monthly readings for those decades. This tells us at least two things: First, for all the anecdotal stories about layoffs, the labor market looks very strong. Second, with full employment achieved, the Fed can focus more fully on price stability. That picture is much less rosy.
Perhaps the most reliable, least volatile measure of inflation is the “trimmed-mean PCE” number put out by the Dallas Fed. Since June of last year, that 12-month inflation number has been in the 4.5%-4.7% range. The most recent reading (November) was 4.6%. While that suggests inflation stability, it does not suggest price stability, which the Fed has defined as 2.0% inflation.
What of the encouraging average hourly earnings number in the latest jobs report? That 0.3% monthly increase accompanied a 4.6% increase over the last year—still above 2%. Further, the average hourly earnings number has not correlated especially well with trimmed mean PCE in recent years (21.8% correlation from January 2020 to November 2022), so there’s little solace in a downward dip.
Under this interpretation, then, the job report’s message to the Fed was: don’t worry about the state of the economy; you’ve achieved full employment. Focus your energies on battling inflation. That’s different from “soft landing.”
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