By Jim Tankersley and Jeanna Smialek
President Joe Biden is overseeing the sort of labor market that, by most measures, any White House would celebrate. Unemployment remains near a half-century low, the Labor Department reported Friday. As it recovers steep pandemic losses, the economy has already added more jobs through November than in any other year on record, except for 2021, Biden’s first in office.
The president cheered those numbers Friday: “We continue to create jobs — lots of jobs,” he told reporters before signing a bill to avert a nationwide rail strike. “We’re in a situation where things are moving — moving in the right direction.”
But for the Federal Reserve, the report offered little to celebrate. Officials have been waiting for hiring and wage growth to slow, paving the way for a more balanced economy in which inflation, which is running near a 40-year high, can return to normal. Instead, both have remained resiliently strong even as the early effects of the Fed’s rapid 2022 interest rate increases begin to play out.
“In the labor market, demand for workers far exceeds the supply of available workers,” Fed Chair Jerome Powell said during a speech this week. Officials are looking for “the restoration of balance between supply and demand in the labor market.”
That divide — between whether strong job gains should be seen as good news for workers or bad news for inflation — underscores the unique challenges that lie ahead for the economy and the White House next year.
The president has consistently preached cautious optimism about the economy, even as inflation has stubbornly defied his administration’s predictions that it would soon moderate. “We are seeing initial signs that we are making progress in tackling inflation, even as we make the transition to more steady, stable economic growth,” Biden said in a news release Thursday, before the jobs numbers were released. “That’s good news for the American people, and further evidence that my economic plan is working.”
The jobs report in some ways supported his sunny take. Employers added 263,000 jobs in November, continuing to provide the backbone of administration claims that the recovery is on track. In a background call with reporters Thursday, administration economic officials emphasized that recent data, including consumer spending figures and current measures of quarterly growth, continues to show the U.S. economy holding up far better than comparable wealthy nations around the world.
Administration aides have also expressed a rising confidence that still-high inflation could, finally, be trending toward historically normal levels.
Yet the same resilience that is giving the Biden administration positive talking points today could create trouble later on if it makes it harder for the Fed to stamp out rapid inflation.
Consumer price index data shows that inflation has begun to moderate, but it remains far faster than the Fed’s goal: It was running at 7.7% in October compared with a year earlier, much more than the roughly 2% annual gains that used to be the norm.
Fed officials do see hopeful signs that inflation will cool next year. Supply chain problems are easing and market-based rent prices are no longer jumping, and both of those changes should provide some relief. But with the labor market so strong and wages climbing quickly, central bankers have also warned that it will be difficult for price increases to fall back to normal levels.
The labor market “shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation over time,” Powell said this week.
That is what makes Friday’s report an awkward one for the central bank. It provided welcome news that the labor market is resilient, on one hand, but it also showed that companies are hiring at more than 2.5 times the pace the Fed thinks is necessary to accommodate population growth. Wage growth re-accelerated on a monthly basis, climbing a hefty 5.1% compared with the prior year.
Investors read the report as a sign that the Fed will need to keep raising rates into 2023. That could make it harder to achieve a so-called soft landing, where inflation slows but the economy avoids recession — an outcome that Biden and Powell say they would like to see.
“To the extent that Chair Powell put some air into the soft landing narrative this week, this report undoes that to some degree,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research.
Dutta said that if the economy remains strong, that could prod Fed policymakers to work harder to slow consumer and business demand. That would increase the chances that the economy gets painfully squeezed down the road, sending unemployment higher.
Biden seemed to brush off those fears Friday, noting that in recent months, wage gains have outpaced inflation: “Wages for working families, in fact, over the last couple months have gone up. Up,” he said. “These wage increases are larger than the increase in inflation over the same period of time.”
But Fed officials have struck a firmer tone, making it clear that pay gains will need to come down in order for them to be confident that inflation is under control.
“Strong wage growth is a good thing,” Powell said this week. “But for wage growth to be sustainable, it needs to be consistent with 2% inflation.”