FINANCE
& TAX
Jobs blowout: What the employment report means
for Biden and Powell
President Joe Biden and the White House can celebrate
the report as evidence the economy is continuing to hum along.
Fed Chair Jerome Powell and the Fed on Wednesday again
raised rates by a quarter of a percent, the eighth straight increase.
By BEN
WHITE
02/03/2023
09:26 AM EST
Updated:
02/03/2023 11:08 AM EST
https://www.politico.com/news/2023/02/03/employment-report-biden-powell-00081067
The U.S.
economy generated 517,000 jobs in January, a surprisingly strong number that
underscores the remarkable resilience of the labor market but could stiffen the
Federal Reserve’s determination to squeeze the economy to fight 40-year-high
inflation.
The
unemployment rate fell to 3.4 percent, the lowest in more than a half-century,
the Labor Department reported Friday.
The number
blew away the Wall Street consensus of 190,000 jobs and suggests that the Fed’s
efforts to cool the labor market by hiking interest rates at the fastest pace
in decades are not yet having the desired impact.
President
Joe Biden celebrated the report as evidence the economy is continuing to hum
along, and the number is likely to blunt attacks from Republicans over the
administration’s spending policies. But senior officials in the West Wing were
privately hoping for a less-robust number. So was Fed Chair Jerome Powell.
Here’s how
the number is likely to play with four key political and economic figures.
Biden — The
White House can view the report as evidence that economists’ predictions of an
imminent recession are off-base. But inflation is Biden’s biggest enemy on the
economy, and the report will cause some unease within the administration, given
that it could mean the Fed will crack down harder on growth to curb prices.
Still, the
report clashes with the expectations of many economists and Wall Street CEOs
that the U.S. will fall into a recession this year. And it was quickly embraced
by Biden’s allies. “Sometimes good news is just good news,” outgoing White
House chief of staff Ron Klain emailed POLITICO. “And this time it’s great
news.”
Biden often
describes the recent slowdown in job growth that preceded Friday’s number as a
good thing as the economy transitions from the rapid Covid-19 comeback to a
period of what he calls more “steady and stable growth.
Senior
White House aides have said they are happy with declining numbers — as long as
they stay positive — making it easier on the Fed to end the rate increases as
soon as possible. They believe the decline in inflation is already well
underway, with consumer price growth slowing for six straight months.
But Biden
took a victory lap, arguing that the report shows his policies are working.
“For the
past two years, we’ve heard a chorus of critics write off my economic plan,”
the president said in remarks before leaving the White House for a trip to
Philadelphia. “They said it’s just not possible to grow the economy from the
bottom up and the middle out,” he said. “Today’s data makes crystal clear what
I’ve always known in my gut: These critics and cynics are wrong.”
Nick
Bunker, head of economic research at Indeed Hiring Lab, said that while
Friday’s report will get a lot of attention, we’ve been seeing “a juggernaut of
the labor market” for several months.
“Employers
have added an average of 356,000 jobs a month over the past three months, and
the unemployment rate dropped to a level not seen since before Neil Armstrong
stepped on the moon,” he wrote in a note. The economy added a robust 4.8
million jobs in 2022.
Powell —
The report is likely to come as a jolt to the Fed chair. Powell said in a
recent speech that the economy only needs to gain about 100,000 net jobs a
month to keep up with the number of new people entering the workforce.
He’s
strongly committed to bringing inflation to the central bank’s target range of
2 percent. Since the Consumer Price Index peaked last June at 9.1 percent,
inflation has steadily fallen, hitting a still-high 6.5 percent in December.
Powell and
the Fed on Wednesday again raised rates by a quarter of a percent, the eighth
straight increase. But it was the smallest bump since March. He cautioned at
his press conference that more hikes lay ahead, saying “the job is not fully
done.”
Any single
report can be an outlier and is unlikely to sway the Fed. But Powell is worried
about the hot jobs market driving up wages, fueling inflation. So any news
showing the market heating rather than cooling could be unwelcome.
“My base
case is that the economy can return to 2 percent inflation without a really
significant downturn or a really big increase in unemployment,” Powell said
Wednesday. “I think that’s a possible outcome. I think many, many forecasters
would say it’s not the most likely outcome, but I would say there’s a chance of
it.”
In one
positive sign for Powell, wages rose 0.3 percent in January, down from 0.4
percent in December. What the Fed chair fears most is a “wage-price spiral” in
which higher wages drive prices and create a dangerous inflation cycle. That is
not evident in this report.
There is
also a chance that seasonal factors, which often make January jobs figures hard
to read, helped trigger the surprising number.
“The
blowout 517,000 increase in total employment was almost certainly a function of
seasonal noise and traditional churn in early year job and wage environment and
exaggerates what is already a robust trend in hiring,“ Joe Brusuelas, chief
economist at consulting firm RSM US, said in a client note.
The survey
week that produces the jobs number was also unusually warm, something that
could have boosted the total, said Ian Shepherdson, chief U.S. economist at
Pantheon Macroeconomics. “My guess is February will be back down around 200,000
because the trend is still slower.”
Economist
Larry Summers — The former Treasury secretary under former President Bill
Clinton has long been saying that more Fed rate hikes will be needed to rein in
the labor market. This report could offer more fodder for that argument.
He said
Friday that it was a positive report but struck a note of caution.
“No
question this was a good number,” Summers said in an interview. “I think the
question on inflation is whether getting through the final few miles will be
nearly as cheap as the first few miles. We are still at levels that would have
been deeply alarming two years ago.”
Summers was
among the few who predicted fairly early that inflation would soar and stay
high for a long period of time. At the time of his initial call last February,
the Fed, the White House and other Democrats were still assuring Americans that
the inflation spike would be “transitory.” It wasn’t.
Summers has
also repeatedly irritated the White House by suggesting that the trillions in
new spending approved by Democrats in Congress and signed into law by Biden
over the last two years played a role in the inflation spike.
He also
maintained for months that the Fed’s rate-hiking campaign, while necessary,
would almost certainly lead to significant recession and a near doubling in the
unemployment rate. He has more recently softened his tone and been more
receptive to the idea that a soft landing is even possible.
“I’m still
cautious, but with a little bit more hope than I had before,” Summers said last
month. “Soft landings are the triumph of hope over experience, but sometimes
hope does triumph over experience.” This number is likely to get Summers to
tilt back toward experience.
House
Speaker Kevin McCarthy — The stunning jobs report will undercut the argument by
McCarthy and other Republicans that Biden’s economy is fading fast under the
weight of inflation, which they say is driven by big spending bills.
Still, the more aggressive the Fed feels it has to be in killing inflation, the higher the risk that the central bank will push the economy into recession. A slumping economy would give the Republicans ammunition to use against Biden and the Democrats in the 2024 campaign
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