The US economy gained 263,000 jobs in November, 63,000 above the consensus estimate. The larger surprise was that average hourly earnings rose by 0.55%, the fastest pace since January.
The robust jobs market is good news for American workers, but concerning for the Federal Reserve and equity bulls alike. It indicates that the Fed's strategy to rein in inflation by raising interest rates isn't quite working and that more painful interest rate hikes are coming.
What's happening: Executives often try to pass the cost of paying higher wages on to their customers by raising the prices of their goods and services. When prices rise, workers often demand more pay to keep up with the cost of living. And if they receive it, prices rise again to maintain corporate profits. This is the inflation-inducing wage-price spiral that Fed officials are desperately attempting to avoid.
The holy grail of economics, then, is often to keep wages up but prices low.
"To be clear, strong wage growth is a good thing," Fed Chairman Jerome Powell said at the Brookings Institution on Wednesday. "But for wage growth to be sustainable, it needs to be consistent with 2% inflation." The year-over-year wage growth rate increased to 5.1% in November, more than double that goal.
Getting back to a sustainable level of wage growth and tamping inflation will require reducing demand for labor. But there were 1.7 job openings for each job seeker in October and the labor participation rate decreased, keeping competition for workers, and wages, high.
The dream is over: For the past year, Powell has advanced the optimistic idea that wage growth could be lowered without slowing the economy into recession. The end of the pandemic would bring workers back from the sidelines and into the labor market, he said, reducing the labor imbalance and easing inflationary pressures.
The thought came straight out of the central bank's 1994 playbook, when the Fed last tempered inflation and successfully executed a soft landing.
But employment today isn't what it was then. Baby boomers were at the height of their careers in the 1990s and immigration numbers were strong. All of that led to a workforce bump that kept unemployment low even as interest rates rose.
Last week's jobs report shows that Americans just aren't returning to the job market. Powell seemed to finally acknowledge that during his speech last week, citing an excess of permanent retirements as baby boomers leave the workforce and the impacts of long Covid are felt. Slower growth in the working-age population, a plunge in immigration and a surge in deaths during the pandemic are also long-term detriments to the labor-supply imbalance, he said.
In short, workers are in demand because there are fewer workers to go around.
Powell also seemingly acknowledged that his dream of a sudden surge in the supply of labor was over and that the path to lowering interest rates while avoiding widespread job loss had narrowed significantly.
"Despite some promising developments, we have a long way to go in restoring price stability," he said.
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