Economists warn US hot jobs data won’t last long

Economists warn that the strongest job creation period in recent history cannot last long as the US central bank grows bolder to take decisive action to cool the economy and root out high inflation.

The largest economy in the world 372,000 more jobs added in June, beating economists’ expectations by more than 100,000 and highlighting the resilience of the U.S. recovery from the coronavirus pandemic.

Nose Federal Reserve bracing for the most powerful monetary tightening campaign since the 1980s—and leaning toward even more aggressive action if data warrants it—that growth is likely to slow significantly.

“You can’t add 372,000 workplaces per month forever because you will be squeezing the workforce to the extreme,” said Eric Winograd, director of economic research for developed markets at AllianceBernstein. He considers a more “steady” pace of averaging 100,000 positions per month.

“Below this, the labor force weakens. In addition, it is being tightened,” he said.

For much of the recovery from the pandemic, labor shortages have been the biggest “binding constraint” on the labor market, according to Stephen Stanley, chief economist at Amherst Pierpont, creating one of narrowest labor markets in history. While he expects this dynamic to continue to weigh on employment growth, the Fed’s move to curtail labor demand will soon begin to take effect as well.

“There is good news and bad news in every strong business indicator right now,” said Andrew Hollenhorst, chief US economist at Citigroup.

“The good news is that you are even further away from a recession. . . but the bad news is that there is more momentum in the economy and more inflationary pressure in the economy, and it could be much harder for the Fed to slow things down.”

Fed officials have already sharpened their rhetoric about how far they are willing to go to keep inflation from taking root, which they now see as a “significant risk” to the US economy, according to minutes since their June policy meeting.

Consensus is emerging among leading policymakers for a second consecutive 0.75 percentage point rate hike at the end of the month, following the first since 1994 in June. This will raise the target range for the federal funds rate to 2.25-2.50%.

By the end of the year, officials plan to raise the discount rate to a level that is moderately holding back the economy, estimated at around 3.5%.

The extent to which the labor market will suffer as a result is a matter of considerable debate. Policymakers are now recognizing that some economic pain may be necessary and may be less devastating than a situation in which inflation remains elevated for much longer.

Despite these concessions, many officials still argue that job losses should not be excessive given the historical labor market tightness and near-record number of vacancies, which may mean that employers are choosing to cut vacancies rather than lay off their employees. employees. Most officials expect the unemployment rate to rise to 4.1% in 2024, a forecast that many economists still consider “wishful thinking.”

“The question of whether there will be a recession is almost irrelevant right now,” said Sonal Desai, chief investment officer for fixed income at Franklin Templeton.

“The reality is that we will need to slow down. We should see wages drop. We have to see how some of the foam in the labor market will come down.”

Additional reporting by Kate Dugid in New York