In its efforts to bring down historic inflation and cool the economy, the Federal Reserve has used several euphemisms to describe the potential impact on Americans’ jobs, from economic “pain” to “unfortunate expense” and a “weaker emerging labor market”.
However, data does not mince words.
The Fed’s latest economic forecasts, released on Wednesday along with a massive third straight rate hike of 75 basis points, show that the central bank expects the country’s unemployment rate to rise to 4.4% next year – versus August’s 3.7% – and possibly as much as 5%. Assuming that the number of employed persons does not change, this would mean that around 1.2 million more people will be unemployed. At the top end of the Fed’s range, at 5%, that would be 2.2 million more unemployed.
“It’s becoming clear that the rose-colored glasses of being able to ease labor market tension simply by cutting job openings are gone,” said Gregory Daco, chief economist at EY-Parthenon. “We now have the implicit insight that for the labor market to cool it will require a significant rise in the unemployment rate and a slowdown in job growth, with potential job losses.”
In the first eight months of 2022, the United States has seen an average net increase of 438,000 jobs per month, according to data from the Bureau of Labor Statistics. 315,000 jobs were added in August. Before the pandemic, the US averaged fewer than 200,000 jobs per month.
Those numbers could go down relatively quickly, Daco said.
“I wouldn’t be surprised that in an environment where companies are more cautious and applying more discretion in their hiring decisions, we could see potential net job losses by the end of the year,” he said.
The strength of the job market is expected to weaken further in the coming months, Ataman Ozyildirim, senior director of economics at The Conference Board, noted on Wednesday in the think tank’s latest release of the Leading Economic Index. The August 2022 index showed its sixth consecutive month of declines, which The Conference Board says may indicate a recession is imminent.
“The average work week in manufacturing has declined in four of the last six months — a notable sign as companies reduce hours before reducing their workforce,” Ozyildirim said in a statement. “Economic activity will continue to slow and likely contract across the US economy. A key driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures.”
Still, this is neither a typical bout of high inflation nor a typical job market, said Robert Frick, a business economist at Navy Federal Credit Union.
The pandemic capsized the labor market and disrupted supply chains to the point that more than two years later, many of these challenges remain and new ones have emerged — such as the war in Ukraine and extreme weather events.
The Fed can’t just “triple click the heels, raise interest rates and lower inflation,” Frick said.
“There are myriad factors now, and it’s a mistake to think the Fed controls more than a handful of them,” he said.
However, the Fed can affect demand by allowing higher interest rates to flow through areas of the economy that make it harder to buy a home, more expensive to buy a car or finance a business, and make credit card balances all the more expensive.
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While parts of the demand side of the economy showed some deceleration in response to the Fed’s moves, the labor market remained an outlier. Unemployment remains at historically low levels, job vacancies are double those of jobseekers and labor force participation remains below pre-pandemic levels.
“I think the Fed is wrong in believing that raising interest rates, even to 4% or more, will intimidate the job market because we are still more than 4 million jobs below pre-pandemic trend and employers money is still working and employers still have to hire people,” Frick said. “And at that point, it’s really like telling the tide not to come — expecting the job market to go down.”
A key reason Fed Chair Jerome Powell wants more slack in the job market is concern that a tight employment situation will push wages further higher, which could then keep inflation high. When the unemployment rate rises, workers lose their bargaining power for higher wages and households back off on spending.
“Powell has said that wage increases that add to inflation haven’t happened yet, but he sees them happening in the future,” Frick said. “It’s all very theoretical now. And I understand that if you want to lower demand, you can increase unemployment…but I really think it’s an open question whether that’s a problem now or not.”
To that end, American workers may have to bear the brunt of a problem they didn’t create.
Powell and the Fed have earned many critics on this front, notably Democratic Massachusetts Senator Elizabeth Warren, who tweeted on Wednesday that she “warned that Chairman Powell’s Fed would put millions of Americans out of work — and I fear he’s already on the way.”
“That’s unfair,” said Frick. “But no one ever said economics wasn’t cruel at times.”
Powell has said that persistent and entrenched high inflation would be worse than a modest rise in the unemployment rate. The Fed’s latest economic forecasts expect GDP growth to slow to 0.2% from 1.7% by the end of this year.
“It’s very slow growth and it could lead to a spike in unemployment, but I think that’s something that we think we need to have,” Powell said. “We believe that we also need to have softer labor market conditions. We will never say that too many people are working, but the real point is this: inflation, what we hear from people when we meet them is that they really suffer from inflation.”
“If we are to line up and pave the way into another phase of a very strong labor market, we need to get inflation behind us. I wish there was a pain free way to do this. There isn’t,” he added.
The next set of key employment data, including job openings, layoffs and monthly job gains, will appear in the first week of October when the Bureau of Labor Statistics releases the September Job Openings and Labor Turnover Survey and Monthly Jobs Report.
Data on jobless claims released on Thursday showed that the number of initial jobless claims for the week ended September 17 was 213,000, according to the Labor Department. Last week’s total of 213k has been revised down by 5k. The weekly claims, which remain near some of the lowest levels in months, underscore how employers are holding tight to workers as the job market remains brimming with opportunities for job seekers.