“We have got to get inflation behind us”. “I wish there were a painless way to do that. There isn’t.” Jerome Powell said. Good news can be good for some but bad for others, and that’s how we can define the relationship between employment data and inflation and the huge trade-off facing policymakers. While having a low unemployment rate may seem favorable for the economy and the workforce, it might also increase inflation which is already reaching all-time highs all over the world and not solely in the US. However, if the government acts to reduce inflation, that might reduce employment and cause a recession that we are already technically experiencing with the 2 consecutive GDP slowdowns in the US.
A leading indicator is the Non farm payroll (NFP) which gives insights into the employment status in the country indicating the strength of the economy and how the Fed would use its monetary policy tools. A strong figure indicates higher employment and productivity; hence, an increase in consumption and spending. However, high employment might lead to increased inflation; thus, pushing for further tightening of monetary policy by the FED. While a weak payroll number might indicate a slowdown in the economy leading to a less aggressive monetary tightening to boost productivity. The non-farm report can have a significant impact on the movements of currencies, equities, and commodities since interest rates have a significant impact on these markets.
NFP measures the number of jobs added or lost in the US economy over the month. The NFP includes professional and business services, leisure and hospitality, healthcare, transportation and warehousing, construction, mining, and the government excluding farmers as the name suggests. The figure is published usually on the first Friday of every month. According to the US Bureau of labor statistics, the total net change statewide is an increase of 315000 payrolls with notable job gains in professional and business services, health care, and retail trade. The surge was possibly caused by the start of the new academic year. However, the total number of employees in the sectors is still down by around 12,000 posts from 2019, when the COVID-19 epidemic significantly altered the labor market.
The expected non-farm payroll report that is to be published on Friday 7th will provide insights into the US labor market. It is expected to slow down to 250k payrolls. Even if the unemployment data come in higher than expected and the average hourly range come in lower-than-expected, it is highly likely to see the Fed hiking interest rates by 75bp in November’s meeting, unless November’s Consumer Price Index (CPI) report reveals a big drop, in that case, a 50bp rate hike would be more likely.
Figure 1: Current and Expected United States Non-Farm Payrolls based on the US Bureau of Labour Statistics and TradingEconomics
The unemployment rate in the US increased to 3.7% in August compared to 3.5% in July as inflation went down from 8.5% to 8.3% in July and August, respectively. Furthermore, Americans’ average hourly earnings increased 5.2% over the previous 12 months compared to a 3% average y-o-y growth pre-pandemic levels as companies are forced to pay higher wages due to the shortage in the labor market. However, taking inflation into consideration, wages have actually fallen over the past 17 months. To control the inflation, the Fed is expected to increase interest rates further which may possibly cost around 1.2 million jobs. During Powell’s press conference in September 21st said “so far there's only modest evidence that the labor market is cooling off. Job openings are down a bit, as you know, quits are off their all-time highs, there's some signs that some wage measures may be flattening out, but not moving up, payroll gains have moderated but not much. And in light of the high inflation we're seeing, we think we'll need to, and in light of what I just said, we think that we'll need to bring our funds rate to a restrictive level and to keep it there for some time.”
And the tradeoff continues facing Jerome Powell and his Board of deciding whether to continue on their current course, which might hurt 1.2 families significantly and reins in inflation more rapidly or to relax their stance and wait for the lag effects to lower inflation, which hurts fewer families with unemployment and allows for a slower rate of inflation control. I would like to end this article by quoting Jerome Powell “We have got to get inflation behind us”. “I wish there were a painless way to do that. There isn’t.” Powell said.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.