The Labor Market and the Soft Landing

Today on TAP: The economy is on track to avert a recession, unless the Fed creates one.

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The jobs report for December, released by the Labor Department on Friday, was about as powerful a rebuke to the Federal Reserve’s perverse recession-mongering as one could hope. It was also substantively very good news.

First, employers continued adding jobs—223,000 in December. That was a slightly slower rate than the 260,000 average in the previous three months, but enough to drop the unemployment rate to 3.5 percent, matching a 50-year record low. All told, the economy added a prodigious 4.5 million jobs in 2022.

Second, workers who had been sidelined by the pandemic continued to return to the labor force. The ratio of employment to population increased slightly. For prime-age workers, the ratio rose to 80.1 percent, or just below its pre-pandemic level of 80.5 percent.

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Third, wages increased, especially at the bottom, but not enough to be accused of driving inflation. December hourly wages increased by 0.3 percent. That’s an annualized rate of 3.6 percent, which closely tracks the declining general inflation rate in recent months.

African American unemployment stood at 5.7 percent, reflecting a better rate of improvement over the past year than for the workforce as a whole.

But average wage gains for the workforce as a whole were modest. Coming out of a pandemic-recession, this picture is about as good as things get.

It shows a well-balanced labor market, with strong job creation, but not so strong as to create inflationary labor costs. Gains to workers are where we most need them, at the bottom.

Will the Fed appreciate that the economy is in good shape and take its foot off the oxygen hose? Little by little, overwhelming evidence is accumulating that the time for rate hikes is past.

It would sure help if the Democrats, who are a 4-3 majority of the Fed Board of Governors—Lael Brainard, Michael Barr, Lisa Cook, and Philip Jefferson—stopped worrying about their loyalty to the misguided Fed chair, Jay Powell, and started showing a little backbone.

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