U.S. Wages Growth Could Feed Inflation Further

Sebastien Callebaut -

THE U.S. JOB MARKET REMAINS STRONG, BUT FOR HOW LONG?

In November, the U.S. economy created 263,000 new jobs, and the unemployment rate stayed at 3.7%, indicating ongoing resilience in the labor market. Employers continue to search to hire despite an unclear economic future and increased recession fears, indicating that the employment market has remained robust this year. Consumer spending, the main driver of the economy, has been fueled by low unemployment and wage growth.

  • How long such strength can endure in light of the Federal Reserve's relentless interest rate increases to control inflation is a key question
  • Even while companies in the technology, entertainment, and real estate sectors are cutting staff, there are still more jobs available than there are unemployed people looking for work

The next year could see a recession and more widespread layoffs as a result of increased interest rates, as has generally happened in the past when rates rose quickly. Economists are attentively observing the hiring rate for any early indications of changes in the labor market's momentum.

A SLOWDOWN IN RATE HIKES NOT IN SIGHT, YET

The labor data are probably not going to have much of an impact on the Fed, which has been gradually raising interest rates this year to combat inflation that is still hovering around its 40-year high. The rate rises have raised the Fed's preferred target range for the overnight lending benchmark rate to 3.75%-4%.

  • “To have 263,000 jobs added even after policy rates have been raised by some [375] basis points is no joke, [...]. The labor market is hot, hot, hot, heaping pressure on the Fed to continue raising policy rates.” Seema Shah, chief global strategist at Principal Asset Management

In a move back from an unprecedented string of four 0.75-point rate increases, the Fed is on pace to raise interest rates by a half-point at its upcoming meeting. The expectation is that higher rates will lead to slower wage growth and less competition for jobs, which will relieve some of the pressure on consumer prices.

LAYOFFS HAVE SO FAR BEEN CONCENTRATED IN INTEREST RATES SENSITIVE SECTORS

Corporate layoff announcements have so far been focused in technology, banking and housing sector, industries that are susceptible to interest rates. Since employment opportunities are still much above prepandemic levels, especially in industries like real estate, other businesses are quickly snatching up laid-off employees.

  • Because there is still a healthy demand for products and services, businesses are still mainly avoiding job cutbacks, as of last month, personal spending was up 0.8%
  • Companies are also reluctant to lay off workers as it was so challenging for them to rehire workers as the economy recovered from the pandemic slump

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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Photo by Clem Onojeghuo on Unsplash