The mythical soft landing seems slightly more achievable


Financial markets’ sudden reaction to Friday’s payroll data was a classic example of “good news is bad news.” The United States created more jobs than economists had expected, ratifying the idea that the Federal Reserve should continue to raise interest rates to curb the highest inflation in four decades. Bond yields rose first and stock futures fell. But markets quickly rethought that narrative, and rightly so. A thorough analysis of the data shows that an optimistic scenario for labor markets and inflation remains intact.

Consider average hourly earnings, which are part of the Labor Department report that showed 261,000 non-farm payrolls were added in October, above the estimate of 193,000. Although the wage measure rose a little more than expected last month – 0.4% from September vs. 0.3% expected – the overall trajectory when using a three-month annualized measure to smooth out month-to-month volatility another shows that income inflation continues to subside, even without a significant increase in unemployment. This data confirmed the most recent signal from the employment cost index, a better but slower indicator of labor market costs. This may help explain why two-year US Treasury yields reversed their rise and fell and the S&P 500 index began to rally strongly.

Ultimately, central bankers are primarily concerned about overheating labor markets as they push wages up. This incentivizes companies to raise consumer prices to offset labor costs in a cycle that can theoretically perpetuate inflation or even push it up. Traditionally, central bankers have fought inflation in part with policies that end up putting people out of work or at least giving them less bargaining power with their bosses. And that has led economists and market participants this year to obsess over the Phillips curve (the relationship between unemployment and inflation) and its distant cousin, the Beveridge curve (the relationship between job vacancies and unemployment).

With job openings still hovering around two for every available worker and the payroll still looking buoyant, many have concluded that both of these metrics need to come down — perhaps significantly — for the Fed to fight the tide. ‘inflation. They’re probably right if history is any guide. But if labor market deflation can be achieved without significant job losses, that would clearly be the preferable outcome. And wage pressures seem to be resolving to some degree, even though these other measures send the opposite signal.

The knock on the average hourly earnings data is that the measure is not adjusted for composition effects, but the trend towards wage moderation seems quite broad. Assuming sustainable productivity growth of around 1.5%, wage growth should be around 3.5% in a low and stable inflation environment. Of the 10 major industry groups, four were already registering wage growth below this pace over the past three months (professional and business services; manufacturing; education and health services; and mining), four are in the above 5% (construction, leisure and hotels; information; and other services) and the rest (financial activities; trade) hover around 4%.

There are still plenty of reasons to worry. If you believe, as economic orthodoxy says, that tight labor markets today lead to permanently higher labor costs tomorrow, this jobs report still leaves a lot to be desired. from the Fed’s perspective. The unemployment rate at 3.7% is still not far from its five-decade low of 3.5%; Americans continue to quit their jobs at high rates, and often for better paying jobs; and the demand for labor still seems to significantly outstrip the supply. Additionally, Americans who have seen their purchasing power decline this year could push for catch-up pay increases as they head into a new year. Overall, it is highly conceivable that the moderation in hourly earnings growth will simply stop at current levels. But at least for now, the positive trend appears to be intact, giving workers and investors a glimmer of hope that a rosy scenario for inflation could yet materialize.

• What does “sufficiently restrictive” from the Fed mean? :Jonathan Levin

• Getting inflation under control is only half the Fed’s battle: Conor Sen

• Your child who doesn’t pay rent is an inflation fighter: Karl Smith

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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