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The 2-minute drill

‘You’re hired:’ US employers continue to expand payrolls and wages at a robust rate

Friday’s jobs report for November is good news for workers, but rising wages may complicate the Federal Reserve’s effort to bring down inflation without causing a recession.

Employers continued to hire last month despite inflation and recession worries.NATALIE BEHRING/NYT

The US job market is bending but not breaking under the weight of rising wages and deepening recession fears, complicating the Federal Reserve’s high-stakes bid to bring down inflation.

Employers added 263,000 jobs in November, the Labor Department said on Friday, defying forecasts of a slowdown as the Fed ramps up interest rates to cool demand among consumers and businesses. The unemployment rate was unchanged last month at 3.7 percent, just above the 50-year low reached before the pandemic hit in March 2020.

The sharpest run-up in borrowing costs since the early 1980s has taken a toll on interest-rate sensitive sectors of the economy, most notably housing and mortgage lending. And after surging 5.7 percent in 2021 as the shock of COVID shutdowns faded, the economy is expected to post minimal growth at best this year.

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Hiring has cooled substantially since the central bank began tightening lending rates in March, but the increases in jobs and wages are running well above the pace the Fed believes is necessary to restrain inflation. The job market’s strength means officials will almost certainly need to boost interest rates higher than they have previously estimated, even if they do so in smaller increments, as Fed chair Jerome Powell indicated earlier in the week.

“The jobs report is encouraging for workers getting jobs & the economy not slipping into recession,” Jason Furman, a Harvard economist and former president of the Council of Economic Advisers under President Barack Obama, wrote on Twitter. “But [it’s] discouraging for the Fed’s hopes that slowing wages will make its job easier.

The November increase in payrolls brought the average gain over the past three months to 272,000 jobs. That’s down from an average of 437,000 jobs in the first eight months of the year. Employers added an average of 164,000 jobs a month in 2019, when the labor market was already considered too tight for comfort.

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Average hourly wages for all private sector workers rose 0.6 percent from the previous month, the biggest one-month increase since January. Wages climbed 5.1 percent over the past year.

The conventional wisdom among economists is that reining in inflation, which is running at about three times the Federal Reserve’s 2 percent target, will require hiring to slow to under 100,000 jobs a month. Fed officials have said they’d like to see wage growth moderate to 3 percent to 4 percent.

On Wednesday, Powell said the direction of wages would be an important indicator for overall inflation. He said that while cost increases for many goods have slowed as COVID-related supply snarls have been untangled, prices for “core” services such as health care, education, and travel, have shown no clear trend lower.

“Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category,” Powell said in a speech at the Brookings Institution.

The job market is tight as a drum because there are simply not enough willing workers to meet employers’ needs. The shortfall is about 3.5 million workers compared with pre-pandemic workforce growth trends, Powell said, citing Congressional Budget Office data.

“We are down a lot of workers,” added Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Wellesley.

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While COVID fears have prevented some people from going back to work, the biggest drivers of the worker shortage are early retirements and a falloff in immigration. At the same time, the number of new firms being started is on the rise.

The number of people working or looking for a job has dropped by 152,000 since the end of 2019. The workforce participation rate has stalled at about 62.2 percent of the adult population this year, compared with 63.3 percent in December 2019.

Against this backdrop, firms are unwilling to let go of the workers that they have managed to hire.

“Employers are going to be more circumspect” about layoffs unless there is a recession, Mullarkey said.

Powell has signaled that central bank officials would lift their benchmark interest rate by one-half percentage point when they meet Dec. 13-14, following four straight supersize increases of three-quarters of a point. That would bring the range to 4.25 to 4.5 percent, up from nearly zero in March.

“Despite the tighter [monetary] policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” he said on Wednesday.

Rhea Thomas, senior economist at Wilmington Trust, said she expected the Fed to stick with the half-point increase even though hiring and wage numbers showed no progress in bringing the strong demand for workers more in line with a stagnant labor force.

“The Fed can’t keep hiking at 75 basis points forever,” she said.

But eventually, she said, policy makers will take rates higher than they had previously forecast, and keep them elevated for longer. In the 1970s and early 1980s the Fed stopped raising rates too early, and inflation roared back. This time around, Powell and his colleagues have said they will wait for clear evidence that the surge in consumer prices is moderating before easing up.

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Many tech companies, including Amazon, Meta, and Twitter, have recently slashed jobs or said they would do so. For now, the damage seems to be contained to tech, with smaller companies picking up the slack.

But pessimism is mounting.

“Our conversations with executives point to a more meaningful deterioration in labor market trends in coming months as companies face weaker sales domestically and abroad, continued cost pressures, and tighter financing conditions,” economists at consulting firm EY-Parthenon wrote in a note to clients on Friday. “We continue to anticipate a US recession in early 2023 . . . and the unemployment rate rising toward 5.5 percent by mid-2023.”

So far the labor market is bending rather than breaking, suggesting the Fed still has a shot at a “soft landing” — bringing inflation back to earth without a recession. But as Powell himself warned on Wednesday: “Despite some promising developments, we have a long way to go in restoring price stability.”


Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.