The government’s jobs report to be released on Friday is expected to show that December was another healthy month for employment – a boon for those looking for work but problem for the Federal Reserve If it persists.
Economists expected employers to add 200,000 jobs last month and the unemployment rate to remain at 3.7%, near a half-century low, according to data provider FactSet.
Last month’s job growth will mark a strong second year of employment for the US economy. Through November, employers added 4.9 million jobs in 2022, after gaining 6.7 million jobs in 2021. All of that hiring was part of a strong rebound from the pandemic recession of 2020, the year in which 9.3 million jobs were lost.
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This past August, nearly two years after the pandemic recession ended, the nation regained all the jobs lost to COVID-19. By contrast, it took nearly six years to recover the jobs lost in the 2008-2009 recession. Most economists credit, in part, the massive federal aid packages, totaling $5 trillion, that Presidents Donald Trump and Joe Biden have pushed for a sharp recovery.
However, government spending and the ensuing job gains also contributed to a rapid rise in inflation year on year, which amounted to 9.1%, the highest level in 40 years, in June. Inflation has been slowing since then, reaching 7.1% in November. Last year, in an aggressive campaign to drive inflation toward its 2% target, the Fed raised its benchmark interest rate seven times.
A solid job gain for December suggests the economy is currently healthy and far from contracting, despite many economists predicting a recession in the second half of this year.
But another month of rapid hiring will make the Fed’s delicate task more difficult. The central bank tries to curb inflation by making it more expensive for consumers and businesses to borrow and spend without causing a recession in the process.
Federal Reserve Chairman Jerome Powell has confirmed in recent remarks Consistently strong job growth, which can force employers to raise wages to find and retain workers, can perpetuate inflation: companies often raise prices to pass on higher labor costs to their customers. Higher wages usually lead to more consumer spending, which can keep inflation high.
For this reason, Powell and other Fed officials have indicated their belief that in order to control inflation, unemployment must rise from its current low level.
“The more the high unemployment target seems to be slipping away from the Fed, the more aggressive it has to be,” said Tim Dewey, chief US economist at SGH Macro Advisors.
Federal Reserve officials expected that they would raise the benchmark short-term interest rate to about 5.1% this year, the highest level in more than 15 years. If employment and inflation remain strong, the Fed rate may have to move higher.
Tech companies have been laying off workers for months, with some, including Amazon, saying they hired too many people during the pandemic. Amazon has promoted layoffs to 18,000 from an earlier announcement of 10,000. Cloud software provider Salesforce says it will cut 10% of its workers. and parent company of Facebook Meta says it will get rid of 11,000.
Small tech companies are also taking a beating. Stitch Fix, the fast-fashion company, said Thursday it will cut 20% of its salaried employees. DoorDash said it will cut 1,250 jobs.
However, outside of high tech, small businesses, in particular, are still hiring. According to payroll processor ADP, companies with more than 500 employees cut jobs in December, while companies below that limit added more workers. And an analysis by investment bank Jefferies showed that small businesses have been posting a historically high percentage of jobs.
The Fed is concerned about the rapid pace of wage growth, which it sees as a reason why inflation is likely to remain high. Average hourly wages are rising at a rate of nearly 5%, one of the highest levels in decades.
Economists believe that growth is likely to reach a solid annual rate of around 2.5% in the last three months of last year. But there are signs that it is slowing down, and most analysts expect weaker growth in the current first quarter of 2023.
Consumers barely increased their spending in November, with a dip Humble holiday shopping. Manufacturing activity contracted in December for the second month in a row, as new orders and production contracted.
The housing market, an important economic frontrunner, has been hit hard by the Fed’s interest rate increases, which more than doubled mortgage rates in the past year. Home sales have declined over the past 10 months.
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