American jobs

The U.S. jobs report was much stronger than expected with a whopping 339,000 jobs (195,000 expected and the previous two months were also revised upward by 93,000), but the unemployment rate rose from 3.4 percent to 3.7 percent (the highest level in seven months) while wage growth slowed to 4.3 percent. Hours worked also fell from 34.4 to 34.3, the lowest level since 2011 (not including the April 2020 drop during the corona crisis). Employers are apparently in no hurry to lay people off yet. Profit margins are too good for that and the labour market is tight. Job growth was carried by the service sector.

Given the inflation data for the coming months, this is insufficient for the Fed to raise interest rates in June or July. Now that the Fed has started pausing, it is also not obvious to raise interest rates again so soon. Most likely, the Fed will not cut interest rates until early next year, whether or not forced by the banking crisis before then. Also, this figure is by no means indicative of a recession.

The labour market gets a lot of attention from investors these days because Jay Powell tells anyone who wants to hear that he looks primarily at this figure (and realized inflation). In itself, it is strange that the Fed looks at two "lagging" indicators, and then the market quickly has a head start on monetary policy. Furthermore, it also shows little vision and creativity. It could cause the Fed to either apply the brakes too strongly or, on the contrary, leave interest rates too low for too long.

Furthermore, the Fed has a new definition of Core inflation. In addition to food and energy prices, the Fed is also removing the housing component from the figure. Now it seems that as long as all the inflation components that are falling are removed from the inflation figure, then there will always be some inflation left. The Fed's argument is that in the remaining core component, wage growth plays a much larger role. To put Powell on edge, Ben Bernanke and Oliver Blanchard have just published a paper arguing that wage growth has not played a major role in recent inflation. The Phillips curve has flattened out, according to the gentlemen; that is, there is a weaker link between inflation and employment. Now Bernanke and Blanchard believe that inflation is transitory (temporary) and caused by supply-side shocks. If so, then interest rates would not have needed to be raised so much. Inflation caused by airline tickets, auto insurance and auto repairs is not so easy to combat with higher interest rates. The transmission mechanism of higher interest rates in the past was through the housing market, but even in the U.S. there is a shortage of housing and virtually every homeowner has a mortgage fixed for 30 years below 3 percent.

The jobs report does represent good news for consumer spending, which is what drives the current economy. Job security is high and job growth along with higher wages puts a solid floor under spending. If inflation falls a bit further, there will also come a time when the average American will also improve in real terms. Still, for now, the Fed has enough to do with rising unemployment combined with lower rising wages.