We’re stuck in one of those bizarro moments when good news on Main Street is bad news on Wall Street.
On Friday, the Labor Department’s latest monthly jobs report showed that US employment held up surprisingly well in September against the headwinds of spiking interest rates and sky-high inflation. Hiring expanded at a solid clip, especially compared with pre-COVID norms.
But the labor market’s resilience just about guarantees that the Federal Reserve will continue to quickly ratchet up lending rates to get prices under control. Investors were hoping for clear evidence of a hiring slowdown that would allow Fed officials to be less aggressive on rates, and they registered their frustration on Friday by extending a bear market that has already slashed $12 trillion off the value of US stocks this year.
Hence this economic Catch-22: Nobody wants runaway inflation. And nobody wants their brokerage account balances to evaporate like the Great Salt Lake.
But nobody wants the Fed to relentlessly jack up interest rates and simply pray it doesn’t topple the economy into a job-killing recession.
And not withstanding investors’ negative reaction, the latest jobs data did offer a glimmer of hope that such a disastrous “hard landing” could be averted.
Economists pointed to these promising details:
1. Employers added 263,000 jobs in September, according to the Labor Department. That is notably less than the 315,000 jobs added in August and a monthly average of 444,000 over the first half of the year.
2. The unemployment rate fell to 3.5 percent last month from 3.7 percent in August. That matches the five-decade low recorded prior to the pandemic, for many a sign the job market is very hot. But there’s an important caveat that suggests the temp is not so extreme. The jobless rate declined because a net of 57,000 people were no longer working or looking for a job in September.
3. Wage increases, an important driver of inflation, are starting to moderate. Average hourly pay for all private sector employees rose 0.3 percent last month, the same as in August and down modestly from the January-June average. On a year-over-year basis, wages were up 5 percent, down a bit from previous months.
4. Job openings fell 10 percent in August, according to Labor Department data released on Tuesday, to a seasonally adjusted 10.1 million from 11.2 million in July. That’s the biggest drop since the early days of the pandemic.
Taken together, these data suggest the trends in hiring and wages are moving in the right direction.
“Things are getting better, but we’re not back to normal,” said Luke Tilley, chief economist at Wilmington Trust.
What would normal look like?
The Fed’s preferred measure of inflation rose 6.2 percent in August, well above its 2 percent target.
Economists said job gains would need to drop to 100,000 or less a month to allow inflation to move down toward that target. They said the Fed would be more comfortable if wages were rising by 3 to 4 percent. And central bank policymakers themselves have projected unemployment would have to climb to close to 4.5 percent next year and stay there in 2024.
“Unlike stock and bond investors, I think there’s more to like in the September jobs report than not,” said Mark Zandi, chief economist at Moody’s Analytics. The numbers “aren’t where the Fed wants them,” he said, but the report “suggests that is where things are headed.”
Fed officials meet next on Nov. 1-2, and investors are expecting them to boost rates by three-quarters of a percentage point for the fourth consecutive time. That would bring the benchmark federal funds rate to a range of 3.75 to 4 percent, up from near-zero in March, and push borrowing costs higher on credit cards, auto loans, and mortgages.
Stocks fell sharply Friday. The Standard & Poor’s lost 2.8 percent to end the week near its low for the year. The tech-laden Nasdaq shed 3.8 percent and is down 32 percent in 2022.
The declines reflect investors’ belief that the Fed will continue to raise rates at least into next year, and that a recession is likely.
That outcome isn’t inevitable, said Claudia Sahm, a consultant and former White House and Federal Reserve economist.
“We do not need a recession to lower inflation, and [the September jobs report] confirms that we are not in recession,” she said. “The Fed should slow its rate increases but is unlikely to do so.”
And so it goes in bizarro world.