The Higgins Report: High Employment Hurts Inflation Fight

November jobs numbers come in hot

By Joe Higgins, Quest 4 Quality

Last week’s November jobs report from the Bureau of Labor Statistics came in much higher than expected, with an increase of 263,000 new hires versus expectations of 200,000.

The unemployment number stayed the same as October at an historically low 3.7%. Wages rose 0.6% last month and surprised economists because it was twice the forecasted increase. On annualized basis, wages were up 5.1%, which was terrible news for the Fed as this rate is inflationary. 

Please remember that Fed Chair Jerome Powell and the Federal Reserve have raised interest rates six times this year for a total of 375 basis points (3.75%) in an effort to slow the growth of new jobs. As of this writing, there were still over 10 million jobs available and only 5 million job seekers to fill them. Businesses across the country are still having a hard time finding workers. 

The Fed’s actions have taken job creation from 528,000 new posts in July to 330,000 in August, 269,000 in September and 263,000 last month. However, no one will say November’s jobs report was soft; by all measures, it remained solid. Powell thinks that by next year he might have to raise the unemployment rate to 4.5% in his effort to control inflation. 

Stock markets did not take this news very well, with the DOW falling 350 points after the numbers were released last week. In more normal times a strong jobs report would have advanced the market, as this is usually a good indicator of better times ahead. Instead, the investors worried this level of job creation would give the Fed 263,000 reasons to raise rates as aggressively as they have over the past 10 months.

Retail establishments did not fare well, dropping 30,000 positions in November. But the concern is that the holiday selling season is just starting and stores will need more workers. Last month’s Cyber Monday sales brought in a record $11.6 billion in revenue, up 6% over last year, and many economists are predicting higher retail sales this November and December. Every indication is that consumers will turn out.

See: Online Sales Soar on Black Friday, Cyber Monday

The good news in October was that the Consumer Price Index (CPI) fell from 8.2% in September to 7.7% and the Producer Price Index (PPI) slipped from 7.1% to 6.6% over the same period. Keep in mind that the CPI was 9.1% and the PPI was 9.7% in June. So, inflation is cooling off after ten months of interest rate increases, which is excellent news. 

Housing and rental prices, which make up about 40% of the CPI index, are down from last year and gasoline prices have fallen by more than $2 a gallon in most U.S. markets, which will help offset inflation’s impact on consumers.

It’s starting to feel like there’s a path to Powell’s “soft landing” for the economy, which is his metaphor for taking the economy down near recession levels but pulling it up just in time to prevent one. The Fed does not have a great track record of making this happen, but given the current strength of the jobs report, it may just work. 

Let’s face it, an economy struggling with inflation at 9.1%, as we had in June, is terrible for everyone. The Fed’s mandate is price stability; global economies will not work anymore without it. But understand that there are two key factors that are out of our hands: One is China’s COVID stance of 100% lockdown, which has caused shortages of everything from appliances and furniture to electronics to baby food. There is word, however, that China may pull back on this policy.

The other issue is the continuing war in Ukraine. The conflict has had a significant impact on food prices, oil and, ultimately, a gallon of gasoline. 

The Bottom Line

Job creation is robust and adding strength to our economy. However, the job numbers will continue to decrease as the Fed raises rates and tightens the economy. Inflation is not yet under control, but it should continue declining slowly and could fall below 4% by the end of 2023. But despite the Fed’s best efforts, inflation is a global problem and our ability to fix it is dependent on international developments.

Joe Higgins is a 45-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor.

Upcoming Events