When the government releases its latest monthly jobs report on Friday, all eyes will be searching for signs that the labor market is loosening up — a key factor weighing on the Federal Reserve as it figures out its next steps to fight inflation.
Economists expect the headline figure to show 250,000 jobs were added in last month. That would be the smallest monthly gain in nearly two years, and well below the average of more than 510,000 for the past 12 months.
Seems counter-intuitive, but the Fed (and much of Wall Street) is actually rooting for that number to go down.
Here's the thing: Before the pandemic and its whiplash-inducing economic rebound, the US economy averaged about 200,000 new jobs each month.
So, while things are slowing down, they're still pretty robust relative to those pre-pandemic normal times. And that's part of what is keeping prices elevated.
Beyond the headline figure, investors and economists will also be hyper-focused on wages, my colleague Paul R. La Monica writes.
Once again, and yes it sounds crummy, but the Fed and others would be happy to see wage growth slow down. Less money in our wallets leaves us with less spending power, and when we stop buying things, prices go down. In theory, anyway. Wages are just one part of the large and complicated inflation puzzle.
In the last jobs report, wages were up 5.2% over the last 12 months. That's historically high (yay!) but it doesn't keep up with inflation, which is hovering around 8% year over year (boo!).
Wages pose a particular conundrum for the Fed. It just wants all of us to shop a little less — but not a lot less. Unfortunately, there's no magic formula for how much wages need to go down to make a dent.
The risk of wages going down too much, too quickly raises the prospect of putting the economy into a state of stagflation, which is as unpleasant as it sounds. Stagflation — a portmanteau of stagnation and inflation — is when economic activity slows while prices continue rising.
BOTTOM LINE: If Friday's headline number comes in above 250K, Wall Street may read that as a sign the Fed is going to have to keep raising interest rates, adding to already-significant strain across financial markets.
If it comes in well below 250K, you might see some renewed optimism that the Fed's policies are starting to have their intended effect, and it may not need to keep inflicting pain on the economy.
BIG PICTURE: It's hard to overstate just how delicate the situation is. In fact, just today, the IMF's managing director, Kristalina Georgieva, described the world as being in a period of "historic fragility" after a torrent of economic shocks over the last two-and-a-half years, from the pandemic to the war in Ukraine.
That's why the Fed's decisions are being so closely scrutinized. When the Fed raises rates as aggressively as it has in the past several months, it creates painful ripple effects around the globe, pushing the US dollar's value up and forcing other central banks to raise their own rates as well. All of which could tip the world's biggest economies into a recession, the UN has warned.
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