Does today’s unemployment report signal a looming recession? The Federal Reserve seems on course for further interest rate increases, even at the cost of higher and discriminatory increases in unemployment. And there’s nothing in today’s report that will likely move the Fed from its current path.
Today’s report from the Bureau of Labor Statistics (BLS) shows very little change in the labor market. Unemployment rate? 3.7%, with a steady three month average (a better indicator than month-to-month) of 3.6%. Jobs? 263,000 more, a decent increase but lower than August’s 315,000 job gain. Average hours in the working week? Unchanged over the last four months.
Does today’s report signal more inflation? Not coming from wages. Although average hourly earnings have risen 5% over the last year, this report doesn’t provide data on real wages, which are adjusted for inflation.
September’s CPI report will be released on October 13, and that’s the more relevant data for the Fed, and for worrying about a recession. The most recent Consumer Price Index (CPI) report for August showed overall inflation rising at 8.3% annually. Core inflation, excluding energy and food, rose by 6.3% over the year.
Compare that to today’s wage data. The report shows an overall 5% annual (nominal) wage increase. Five percent may seem like a big number, but that isn’t adjusted for inflation. When you compare the 5% wage increase to an annual CPI increase of 8.3% (or even 6.3% for core CPI), average real wages actually are declining. So wages aren’t driving inflation.
A recent report from researchers at the Dallas Federal Reserve tells us more about this real wage decline. It found that real wages are declining for the “majority of workers,” who experienced a median decline around 8.5% in the past year. (Almost 47% of workers’ wages beat inflation in the past year.) The report says we are in an “unparalleled period of declining real wages” compared to other times in the past few decades.
That’s because inflation is running hot, leading Chairman Jay Powell and the Federal Reserve to keep raising interest rates. Powell recently testified the Fed would keep raising rates until they saw a “modest” increase in unemployment and “clear evidence” that inflation is falling. He was clear that the Fed would keep this up even if it caused a recession.
Remember that for economists, unemployment is a “lagging indicator”— that is, it usually follows changes in other macroeconomic variables rather than leading them. As Forbes contributor Teresa Ghilarducci has pointed out, that makes it a “lousy recession indicator.” Stronger economic growth leads to more jobs, and when the economy slows, there’s usually some lag time before employers start cutting jobs.
Economist Dean Baker, like others, has criticized the Fed’s drive towards a recession. Baker and Nobel laureate Joe Stiglitz recently pointed out inflation hasn’t been coming from wages, but from commodity prices, especially food and energy. These have been trending down in recent months, although the announcement by Russia and OPEC that they’ll cut oil production will likely boost energy inflation, especially as we enter winter in the northern hemisphere.
Baker, like other economists, also reminds us a recession will hit the poorest and most vulnerable workers the hardest. The AFL-CIO’s Chief Economist Bill Spriggs tells us “Black workers are the canary in the coal mine,” who will be the first to suffer from a recession.
In effect, the Fed’s interest rate cuts will create unemployment for lower-income workers, along with Blacks and Hispanics, in order to fight higher commodity prices driven by Russia’s Ukrainian war and OPEC’s refusal to cooperate with President Biden.
Interest rate increases are a very blunt and inappropriate tool for fighting commodity inflation. But as the old saying goes, “to someone with a hammer, everything looks like a nail.” Today’s report won’t stop the Fed from hammering away, hitting jobs and vulnerable workers in the process.