Last week, the Bureau of Labor Statistics shocked the market by announcing that the
economy
generated 517,000 new jobs in January, with the unemployment rate falling to the lowest level since 1969. The market anticipated an employment number of just under 200,000.
Unfortunately, the employment number is a head fake.
The upside surprise was almost certainly due to faulty seasonal adjustments. On the shockingly high upside surprise, Mark Zandi, chief economist of Moody’s Analytics,
tweeted
“Whoa! Most likely, difficulty seasonally adjusting the data. This January was the 5th warmest on record.” On an unadjusted basis, employers in the United States
shed
2.5 million jobs in January. Individuals who were hired for the holiday shopping season were let go. In January, revisions to the employment market can be significant.
Still, the January employment data confirms that the labor market is resilient. The Federal Reserve remains concerned about tight labor markets, elevated wage inflation and how those two factors impact core services inflation. The Federal Reserve Bank of Atlanta says, “sticky price inflation is running above 5%.”
It’s my assessment that the Federal Reserve will raise interest rates two more times at a minimum. If the labor market remains resilient and if wage inflation continues to run at current levels of around 5% then the Federal Reserve could tighten a third time at its June 13-14 meeting. Regardless, rate increases will happen in mid-March and early May. The Federal Reserve is determined to reach its 2% inflation target, that won’t happen until 2024 at the earliest.
When the Federal Reserve stops raising rates, it won’t pivot to a rate cutting cycle. It will keep rates high for an extended period. President Biden and his Democratic Party are celebrating the strong employment report and data on GDP growth in the 4th quarter of 2022. The economy expanded at 2.9% on an annual basis. But the headline 4th quarter GDP number exaggerates the underlying strength of economic activity. Real final sales to domestic purchasers, the best measure of the underlying strength of the economy, only grew by
0.2%
in the 4th quarter. Economic growth is decelerating. The manufacturing sector is in recession.
The research firm S&P global says that the services sector is contracting. Prices for residential housing have peaked and are falling in some geographies. Low-income households are
experiencing
financial distress. But in the face of clear evidence that the economy is slowing the Federal Reserve will continue to raise rates. The Federal Reserve is very concerned about sticky inflation in the core services sector. The Federal Reserve wants to bring down wage inflation from the current 5% level to a level consistent with 2% inflation.
With secular productivity growth trending around 1.5%, to achieve its 2% inflation target the Federal Reserve will maintain tight monetary policy until wage inflation falls toward 3.5%.
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The reality of sticky wage inflation, stubbornly high core services inflation and decelerating economic activity suggests that the economy could slide off the economic slope in a hurry. Hard economic times could be ahead. It is way too early to celebrate. The January employment report was a false dawn.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.
