Explore how a strong job market kept inflation in check against expectations.
The Unexpected Combination
Few economists were expecting the combination of a strong job market and moderate inflation when 2023 came to an end. But this unanticipated union ended up shaping last year’s economic story.
Good Luck or is Progress Here to Stay?
Now, the question is whether this fragile balance between a thriving labor market and moderate inflation will be maintained in the upcoming year or if it is just a fleeting bit of good luck.
Seasonally Adjusted Jobs Make Big Impact
According to the most recent Labor Department report, the U.S. economy created 216,000 seasonally adjusted jobs in December. This final push helped to bring the year’s total job gains to over 2.7 million.
Revisiting the Estimates
Economists who had projected employment losses for 2023 at the start of the year were forced to revise their estimates in order to make their 2024 predictions.
Unemployment Rate Compares to 2017
In addition, the unemployment rate, which was projected to be 4.7% at year’s end, was only 0.2% higher in December than it was at year’s end in 2017.
Direction of Inflation
The fact that the Federal Reserve raised its interest-rate target to the highest level in more than 20 years adds complexity to the discussion about jobs versus inflation. The direction of inflation kept moderating in spite of this monetary tightening.
The Fed’s Favorite Gauge
The Fed’s favorite gauge of consumer prices increased 2.6% in November over the prior year. In comparison, there was a 5.4% year-over-year increase in December 2022.
Food & Drink
With food and energy excluded, November’s inflation rate was 3.2%, down from 4.9% in December 2022.
Challenges Still Abound
Nevertheless, the job market is not without its challenges. The report shows the percentage of persons who are actively looking for work significantly decreased, and this decline is hidden by the stable unemployment rate.
The Household Survey
The household survey, which is one of many tools used to calculate the unemployment rate, showed a decrease of 683,000 working people. The household survey regularly revealed lower employment gains than the employer survey, despite being smaller and more erratic.
The Factors at Play
This variance is caused by a number of factors, including differences in survey populations and challenges in seasonally correcting data. The pandemic has had lasting effects on seasonal job adjustments that can obscure the results.
Possible Distortion
The employment numbers in the household survey may be distorted by an undercount in the population, or the job market may not have been as strong as first reported.
Updates Still to Come
This dynamic may be clarified by upcoming adjustments to the employment and population statistics in the January employment report.
Labor Force Participation
Furthermore, even though the labor force participation rate decreased in December, it was still higher than it was in December 2022.
The Discrepancies
The household survey showed an increase of around 1 million workers, whereas the employer survey showed an increase of 2.2 million jobs during the same time period.
An Aging Population
The increase exists across surveys, which implies that despite an aging population, more prospective workers are joining the workforce.
Hourly Wages Climb
The average hourly wage climbed by 4.1% in December compared to the prior year, a decrease from the 4.8% gain in December 2022, indicating that the greater supply of available labor has led to the cooling of wage growth.
Easing Concerns
This tendency has eased concerns about an overheated labor market, combined with declining inflation. Even if the labor market holds up, the Federal Reserve will have more room to lower rates as long as inflation stays low.
The Economic Dynamic Duo
Traditional economic predictions have been confounded by the unexpected coexistence of a growing labor market and cooling inflation in 2023.
Maintaining the Balance
Maintaining the balance in 2024 will be difficult due to variables like wage growth, labor force participation, and possible adjustments to employment data.
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The post How a Strong Labor Market Is the Answer to Rising Inflation first appeared on From Frugal to Free.
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The content of this article is for informational purposes only and does not constitute or replace professional financial advice.
