December 2022 jobs report: Why the Fed is probably happy about it

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Has the economy swerved away from a recession? Here’s what the December 2022 jobs report suggests.

The latest Bureau of Labor Statistics report indicates that the economy continues to be in a strange place. But in December, that strange place might be one that’s veered off the road to a recession.

While it’s just one month, the December figures may have navigated between the Scylla of economic contraction and the Charybdis of Fed-frightening wage growth. The latest figures don’t just show better-than-expected jobs growth, but also that average hourly earnings grew “only” by 4.6 percent, falling below 5 percent, while past high wage growth numbers were revised slightly down. That lukewarm growth may be good news in the eyes of the Fed, which tends to punish the economy when it gets too hot.

The Federal Reserve has made clear that, in its eyes, wages have been growing too quickly and that, as a result, it will continue to raise interest rates. The December jobs figures may have managed to strike an equilibrium.

Despite frequent predictions of a recession, the economy appears to be growing steadily, with the labor market churning out around 200,000 job increases in total employment every month. December was no different, according to the latest Bureau of Labor Statistics figures — 223,000 new jobs were added, compared with the 200,000 predicted, basically in line with jobs figures since the fall. The unemployment rate also dropped to 3.5 percent.

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The other concern is, of course, inflation, which is slowing down from its summer peak but is still historically high. If this state of affairs continues — labor market expansion on one hand, and moderating wage and price inflation on the other — the U.S. economy may achieve a “soft landing,” where inflation comes down while avoiding massive damage to the labor market.

But massive damage is still certainly possible. The Federal Reserve has been very clear that while it doesn’t intend to strangle the economy with its interest rate hikes and throw people out of work, it is willing to do so in order to get inflation back toward 2 percent. The latest economic projections from the Fed foresee a roughly 1 point increase in the unemployment rate that would likely translate to something around a million people thrown out of work.

Federal Reserve Chair Jerome Powell has been very clear that for inflation to come down, wage growth, which had been running at around 5 percent, will need to fall, with Powell describing wage growth in a November speech as “well above levels consistent with 2 percent inflation over time.” And while inflation in some areas — like goods and eventually housing — has or likely will soon stall out or even go into reverse, Powell and the Fed remain focused on inflation in the non-housing services sector, which is thought to be more closely tied to wage growth. In sectors like dining, the wage bill takes up a large portion of the total cost of the service, so the Fed thinks prices are unlikely to stop rising quickly if wage growth remains high.

That’s why past monthly jobs reports, while showing employers willing to hire new workers, have sometimes been interpreted negatively by financial markets. If wage growth was too high, it would mean more interest rate hikes and a worse outlook for the stock market and the overall economy.

Another positive note is the portion of the population that is working is starting to tick up as well. Unemployment, which is historically low, takes the portion of the population that is working or looking for work and sees how many are not working. But another measure, the employment-to-population ratio, looks at just that: how many people in a certain age range have jobs versus the total number of people. And that ratio ticked up to 80 percent for people between 25 and 54, the age group most likely to be employed, approaching pre-pandemic levels.

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That helps explain the financial markets reactions: Stocks opened up, and yields on U.S. government debt dropped, both indications that traders expect less severe interest rate hikes in the future.

Financial markets take the Fed’s expected response into account but also look at the number of new jobs created and the growth in average hourly earnings.

Thanks to Lillian Barkley for copy editing this article.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.