Jobs Report Signals Fed: Cut It Out, Stop Raising Interest Rates

Opps, total nonfarm payroll employment increased by 209,000 in June, far below the 225,000 economists expected yesterday.

Workers are not getting or demanding big wage increases – though average weekly earnings for all private sector workers in June increased by a $7 to $1,155 up from May’s $1,148. But higher prices are still eroding buying power.

Workers Are Getting Paid In Reduced Commute Costs, Not Money

Employers and workers are finding ways to get work done without crazy wage increases. Judith Lamb, of CloudPay — a global payments organization –, told me this morning that even though employers are relieved the “Great Resignation” from last year may be moderating or ended, employers are keen on recruiting. “Employers are digging deeper into LinkedIn to reach out to talent,” Lamb said. But they are also trying to stop their own employees from leaping.

Employers are on the knife edge of being a poacher while resisting being a poachee.

Even though workers won’t leave their current job for the same money and working conditions they are threatening to leave if they don’t get the working conditions they want: remote work. Workers, when they can, are grabbing noninflationary increases in living standards in several ways. They are saving on commute costs and employers are accelerating vacation time accrual and giving non-costly, but emotionally-valued perks, like birthdays as a personal one-day holiday. Lamb said employers demanding onsite 5-days a week will lose many workers. One to three times a week is becoming a norm.

Bottom line: though employers may be bedeviled by tight labor markets; employers, lucky to have some work done remote, can attract and retain employees in flexibility and not inflationary pay increases.

Therefore, the Fed needs to ground itself in reality and stop being haunted by the inflation of the 1970s when U.S. Fed chief Paul Volker halted inflation with relentless interest rate hikes and a crushing recession.

June Jobs Report And Wobbly Worker Confidence

Though the U.S. unemployment rate stayed at a super low rate of 3.6% in June, it is still higher than April’s 3.4% rate. And, remember, the unemployment rate is a lagging indicator — reflecting the supply and demand of workers several months ago, the true rate could be higher now.

Today’s job report indicates the tight labor market is finally attracting people to work. The new entrant share of the unemployed increased to 9.3% up from 8.4% last month. The job leaver rate also increased from 12.6% to 13.2%. Layoffs are a lower share of the unemployed — 48.4% down from 48.9% in May; but mind you this is a big increase, almost a 7-percentage-point increase from a year ago.

Two months ago we saw worker confidence falling significantly from last year. April 2023 quit rates fell to 2.4%, way down from the April 2022 quits rate of 3.0%. May quits rates are a little higher at 2.6%. ZipRecruiter survey shows workers’ confidence is falling. Job seekers’ confidence that jobs will be more plentiful in 6 months fell from 35% in the first part of 2022, to a low 25% in April 2023.

Workers are not so feisty.

Why 2% Inflation Target Needs Rethinking

In a European Central Bank Forum, Paul Krugman, in 2014, started the conversation about the 2% inflation target we hear about so much. Writing for an audience of central bank governors and staff economists, he argued the 2% inflation target is out of date. Nine years later we still haven’t answered why we should accept 2%.Why not target 4% inflation or have zero tolerance? 2% seemed like a good fuzzy comprise.

Over the course of the 1990s, many of the world’s central banks converged on an inflation target of 2%. Why 2%, rather than 1% or 4%? Krugman says the 2% target “was not arrived at via a particularly scientific process, but for a time 2% seemed to make both economic and political sense.” And once the 2% gets widely adopted it takes on a power on its own. “Central bankers could not easily be accused of acting irresponsibly when they had the same inflation target as everyone else.”

2% can really be no inflation. Prices go up and so does quality. The $1000 computer of today is worth a lot more than the $998 computer of last year. Quality improvements make a price increase look bigger than it is. But quality improvements also means we could have an inflation target of 4%. And if productivity is up and wages are falling behind then buying power does not have to be crushed with big interest rate hikes.

The economic costs of recession and austerity can be far higher than inflation exceeding 2%. Respected macroeconomists at the Brookings Institution and Ball argue for a sharply higher target, of say 4%..

Inverted Yield Curve Signals A Weaker Economy

Another sign that a recession may be underway is an inverted yield curve — the spread between 10-Year Treasury Constant Maturity and 2-Year Treasury Constant Maturity bonds adjusted for inflation is still quite negative consistent with indicating a recession.

The May survey of business economists found most expected very modest growth with almost half expecting a recession by the end of the year.

So, enough already Fed. Do central bankers really need to see workers surrender before they stop hiking interest rates and risking recession?