WASHINGTON – A month ago, the government released a bombshell jobs report showing that American employers added more than half a million jobs in January, double the gains in December and far more than economists had predicted.
The February jobs report, due out on Friday, will be closely watched by economists who want to know whether the bump in January was a one-off or a sign of a strengthening economy.
The answer could have a profound effect on what the Federal Reserve does in the coming months. A second month of tight hiring could fuel fears that inflation is picking up again after months of steady declines. In response, the Fed is likely to continue its aggressive pace of rate hikes starting at its next policy meeting in two weeks.
Some economists believe the central bank will announce a significant increase in its short-term policy rate by half a point, rather than by a quarter point, as it did at its February meeting. During testimony to Congress this week, Chairman Jerome Powell made it clear that the Fed would increase the size of its rate hikes if evidence points to a robust economy and persistently high inflation.
When the Fed raises its benchmark rate, it usually leads to higher rates on mortgages, auto loans, credit card debt and business loans. The purpose of raising lending rates is to cool borrowing and spending and slow inflation.
Economists had expected employers to significantly slow hiring in February, adding 208,000 jobs, according to a survey by data provider FactSet. While that figure is well below January’s gains, it’s still consistent with a healthy economy.
Fast hiring typically leads companies to offer higher wages to attract or retain workers, and their higher labor costs are often passed on to their customers through higher prices. This is a cycle that tends to keep inflation high.
Powell told the Senate Banking Committee on Tuesday: “We have two or three more important pieces of data to analyze before the Fed’s next meeting.” “These are going to be very important.”
Along with Friday’s jobs report, these data releases include Tuesday’s February consumer inflation report. Last month’s January inflation report sounded the alarm by showing that consumer prices rose again month-on-month.
Strong hiring data for January was the first in a series of reports showing the economy accelerating earlier in the year. Employers added 517,000 jobs, the most in a year, and the unemployment rate was 3.4%, the lowest level since 1969. Sales at retail stores and restaurants also rose, while the Fed’s preferred measure of inflation rose from December to January. the fastest pace in seven months.
The strong data belied cautiously optimistic talk that the economy had cooled slightly — perhaps enough to bring inflation under control without triggering a deep recession. Today, the economic outlook is much more bleak.
High borrowing rates have fueled the housing market as home sales fell for a 12-month straight, a consequence of the average mortgage rate almost doubling over the period. The manufacturing industry is also showing signs of weakness. High rates have made it difficult for businesses and consumers to borrow money to buy critical manufacturing assets, from machinery to cars to appliances.
Conversely, spending on services – such as travel, restaurants and entertainment – remains strong. Many Americans continue to engage in limited activities during the COVID shutdowns.
Analysts say one reason for the slowdown in hiring in February is that some of the big hires in January reflect one-time factors. For example, the weather was unusually warm, which allowed more people to go out and spend money and more construction projects. The Federal Reserve Bank of San Francisco estimated that the weather added about 120,000 jobs to the January total.
The strike by University of California system workers has ended, adding 36,000 jobs to the January job total. Stripping out these two factors would reduce job growth in January to about 360,000, the average gain over the past six months.
Hiring, even at this rate, is about three times what the Fed wants. A gain of about 100,000 jobs per month would be enough to keep population growth at bay and prevent unemployment from rising. Such a low figure also means that employers are not so desperate for workers and may not need to keep raising wages.
Of course, higher wages are good for employees. But Fed officials say it will contribute to higher inflation, especially in labor-intensive service industries such as restaurants, health care and hotels.
“Strong wage growth is good for workers, but only if it is not eroded by inflation,” Powell said during congressional testimony on Wednesday.
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