Published: December 2, 2022 1.58pm EST
The
economic rationale behind hiking rates is that it increases the cost of
doing business for companies. This in turn acts as brake on the
economy, which should cool inflation.
But that doesn’t appear to be happening. A closer dive into November’s jobs report reveals why.
It shows that the labor force participation rate – how many
working-age Americans have a job or are seeking one – is stuck at just
over 62.1%. As the report notes, that figure is “little changed” in
November and has shown “little net change since early this year.” In
fact, it is down 1.3 percentage points from pre-COVID-19 pandemic
levels.
This suggests that the heating up of the labor market is being driven
by supply-side issues. That is, there aren’t enough people to fill the
jobs being advertised.
Companies still want to hire – as the above-expected job gains
indicate. But with fewer people actively looking for work in the U.S.,
companies are having to go the extra yard to be attractive to job
seekers. And that means offering higher wages. And higher wages – they were up 5.1% in November from a year earlier – contribute to spiraling inflation.
This puts the Fed in a very difficult position. Simply put, there is
not an awful lot it can do about supply-side issues in the labor market.
The main monetary tool it has to affect jobs is rate hikes, which make
it more costly to do business, which should have an impact on hiring.
But that only affects the demand side – that is, employers and
recruitment policies.
So where does this leave the possibility of further rate hikes?
Viewing this as an economist, it suggests that the Fed might be eyeing a
base rate jump of more than 75 basis points on Dec. 13, rather than a
softening of its policies as Chair Jerome Powell had suggested as recently as Nov. 30.
Yes, this still would not ease the labor supply problem that is
encouraging wage growth, but it might serve to cool the wider economy
nonetheless.
The problem is, this would increase the chances of also pushing the U.S. economy into a recession – and it could be a pretty nasty recession.
Wage growth still trails behind inflation, and for one reason or
another people have been opting out of the labor market. The logical
assumption to make is that to make up for both these factors, American
families have been dipping into their savings.
Statistics back this up. The personal saving rate – that is, the
chunk of income left after paying taxes and spending money – has fallen
steeply, down to 2.3% in December from 9.3% before the pandemic. In fact, it is at its lowest rate since 2005.
So, yes, employment is robust. But the money being earned is eroded
by soaring inflation. Meanwhile, the safety net of savings that families
might need is getting smaller.
In short, people are not prepared for the recession that might be lurking around the corner.
And this is why I am gloomy.