America’s latest employment numbers paint a contradictory picture of a tight labor market. Although the unemployment rate has decreased, inflation expectations are increasing. The unemployment rate fell to 4.4% in December, down from 4.6%, beating economists’ predictions of 4.5%. Against this very positive backdrop, the economy managed to add only a net 50,000 jobs. This was well below market expectations, which were looking for a 60,000 increase. Taken together, the two figures reflect a complex economic environment as the Federal Reserve considers its next moves on monetary policy.
The core of the report lies in the fact that the five-year inflation outlook climbed to 3.4%. This beats predictions of 3.3% and is an increase from 3.2% last month. Whether this increase in inflation expectations affects future monetary policy decisions remains to be seen. In particular, it might affect interest rates and future cuts.
Unemployment Rate and Job Growth
The decrease in the unemployment rate to 4.4% represents a high point for the labor market. Analysts point out that this drop is a welcome sign of a rapidly recovering job market, helping to fuel consumer confidence and spending. At 3.8 percent, the unemployment rate is back at its lowest point since the first quarter of last year.
While unemployment has gone down, job creation is failing to keep pace. Or that in December, the U.S. economy added just 50,000 jobs in total. That’s a significant deceleration from November’s increase of 64,000 jobs. This serious underperformance raises the question of whether any of this job growth can be sustained moving forward. Economists had expected a much stronger gain, underscoring areas of weakness in some sectors of the economy.
Additionally, the numbers point to some wide-ranging signs of a labor market cool down that will likely play a role in guiding the Federal Reserve’s ongoing policymaking. After surprising on the downside with weaker-than-expected job growth, worries are mounting that the economy isn’t quite as resilient as suggested by prior data.
Earnings Growth and Inflation Expectations
If job growth disappointed, earnings growth at least pointed to signs of acceleration. Average hourly earnings rose 0.3% month-on-month in December, as expected, and up from November’s lackluster 0.1% gain. Earnings growth sped up to 3.8% YoY. This increase easily beat expectations and underscores a tight labor market that may be pushing wages upward.
The continued rise in earnings is a welcome sign for workers, as it can begin to counteract the increasing costs brought about by inflation. One-year consumer inflation expectations unchanged at 4.2% in January, a tick above economists’ prediction of 4.1%. These inflationary pressures might encourage fed board conversations about how interest rate shocks might affect macroeconomic stability.
The five-year inflation forecast has increased to 3.4%. This is a significant shift, reflecting that market participants are recalibrating their expectations for how inflation dynamics will develop in the future. This adjustment could influence financial markets and the broader economic outlook as stakeholders consider the implications for consumer spending and investment.
Federal Reserve Implications
The muddy message from the latest employment report was enough to turn minds on the likelihood that the Federal Reserve will make a monetary-policy move. As a result of this data release, odds for a near-term March interest rate cut decreased to 29.6%. This was down from 38.6% the day before. Yet, investors are making a counterintuitive bet on caution. They are aggressively reacting to counterproductive mixed messages from the labor market with an eye towards climbing inflation expectations.
In normal times, economists would view the sharp drop in unemployment as great news. They caution that lackluster job growth could keep the Federal Reserve from making deep rate cuts anytime soon. And of course, decision-makers will be looking hard at relevant economic indicators. They should prudently weigh how to accelerate stronger employment recovery against the dangers of inflation surging.