President Biden loves to brag about the 10 million jobs employers have created since he took office. But Biden, like many investors, must be quietly hoping employers knock off all the hiring, at least for a while.
The jobs report for September was solid, but in the current fun-house economy, that’s bad news. Employers created 263,000 new jobs in September, which is slower than the pace of hiring for the prior three months, which averaged 372,000 new jobs. But 263,000 new jobs is still a bigger jump in employment than would be normal in a healthy economy. In 2018 and 2019, for instance, job gains averaged 189,000 per month, which was not too hot and not too cold.
The September numbers are too hot, even with the slowing pace of growth. That’s because of inflation, currently running at 8.3%. The Federal Reserve is aggressively raising interest rates in order to slow economic activity. As lending costs rise, consumers and businesses borrow less and spend less. That depresses demand, which is supposed to bring prices down and solve the inflation problem.
The Fed won’t come out and say it, but part of the inflation-fighting plan is to cool the hot labor market and push up the unemployment rate. Fewer workers earning a paycheck is one sure way to bring down aggregate spending. The September job numbers show the Fed’s strategy isn’t working, yet. The unemployment rate actually dropped from 3.7% to 3.5%, which would be great if inflation weren't a problem.
As it is, however, the September numbers make clear that the Fed has a lot more work to do. “Job growth and wage gains cooled, a bit,” Oxford Economics reported on Oct. 7. “However, the drop in the unemployment rate back to a cycle low underscores that the labor market remains extremely tight. The Fed will view the jobs report as a reason to continue its aggressive pace of tightening.”
The stock market swooned (again) on the September job news, with the S&P 500 index losing nearly 2%. Investors have nothing against jobs, but there’s been a lot of wishful thinking about inflation easing, and the Fed turning a bit more dovish. Nope, sorry, not yet, anyway. The Fed’s next meeting ends Nov. 2, and it seems all but certain to once again raise rates by three-quarters of a point, continuing the fastest rate-hike regime since 1980.
The stock market can’t get any footing with such aggressive rate hikes looming. Stocks have staged several mock rallies during the last few months, such as the 5.5% gain from Oct. 3-5. Investors thought they spotted signs of receding inflation, but they were squinting too hard. The job numbers snuffed out that rally.
The Fed’s agenda is getting tense. Interest rates still aren’t that high, but the rapid pace of Fed hiking is causing stress all around the world. Spiking US interest rates have sent the value of the dollar soaring, which is a big problem for developing countries that suddenly find their own currencies devalued. A United Nations agency recently called on the Fed to back off, lest it wreak havoc in the developing world. Fed Chair Jerome Powell has acknowledged such possibilities, but basically said, nah, not our problem.
Today's jobs numbers are an encouraging sign that we are transitioning to stable, steady growth. And more Americans are working than ever before.
There's more to do to grow our economy from the bottom up and middle out, but we're making progress.
— President Biden (@POTUS) October 7, 2022
Rising rates are also sending the once-hot housing market into reverse, with affordability nearing rock-bottom levels. The Fed doesn’t really care about that, either, since double-digit housing price hikes are one type of inflation it’s trying to corral.
What’s an unpopular president to do? Look on the sunny side. “Today’s jobs numbers are an encouraging sign that we are transitioning to stable, steady growth,” Biden tweeted on Oct. 7.
Transitioning from what? Unstable and even absent growth. But okay, sure, stable and steady. “And more Americans are working than ever before,” Biden added. He's right, but that has become a weird liability.
It does seem inevitable that the Fed is going to get its way, and slow the economy enough to slay inflation. The question is whether it will cause a recession in the process. Capital Economics recently changed its outlook and now thinks it’s “more likely than not” a mild recession will arrive early next year. Recessions usually entail job losses, by definition.
So the tight job market might not last much longer. Should we celebrate?