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dean baker
The Really Great February Jobs Report
If wage growth is now more or less in line with the 2% target, then the Fed can hold off on further rate hikes.
Mar 12, 2023
The failure of Silicon Valley Bank on Friday overtook the really big event of the day, the February jobs report. The 311,000 jobs were far more than I had expected. I thought the huge January number was a fluke of seasonal adjustments and unusually good winter weather. For that reason, I expected the February number to be very weak, not because I thought the labor market had crashed, but just as a correction to the high number in January.
I was wrong in a very big way. The January number was obviously real and the economy is still creating jobs at a very rapid clip.
This is somewhat concerning in that there is no way the economy can keep creating jobs at this pace without seeing some serious inflationary pressure, but this is where the other part of the good news story comes in. Wage growth slowed in February. The slower growth in February, combined with a downward revision to the January number, gave us a 3.6% annual rate of wage growth over the last three months.
This pace of wage growth is consistent with the Fed’s 2% inflation target. We had wage growth at this pace through much of 2018 and 2019 even as inflation was coming in slightly under the targeted rate.
I ordinarily would not be cheering slower wage growth, but the reality is that the Fed is determined to bring inflation down towards its target. If wages are growing at a pace that is faster than is consistent with its target, it will keep raising rates, and throwing people out of work, until wage growth slows.
If wage growth is now more or less in line with the 2% target, then the Fed can hold off on further rate hikes. Hopefully, it would then allow the economy to continue to grow with the unemployment rate remaining near 3.5%.
Of course, we do need to see real wage growth and inflation has been running faster than 3.5%. However, there are good reasons for believing that inflation will be slowing in the months ahead. Most importantly, we know that inflation in rents will slow sharply, as private indexes measuring rents of units coming up on the market have showed little or no inflation in recent months. The CPI rent index, which measures the rent of all units (both those that come up on the market and those with a continuing tenant) follows these indices with a lag of 6-12 months.
It is also likely that we will see further drops in many of the supply chain goods, most importantly cars, where temporary shortages sent prices soaring in the pandemic. This will help put downward pressure on inflation in goods, and also services like car repairs, where the cost of goods is a large part of the price.
And, we are also likely to see less inflation in food prices. The wholesale prices of many items, most notably eggs, has fallen sharply in the last couple of months. This should show up in lower prices in stores.
If we have a story where wages are rising at a 3.6% annual rate, and inflation falls to under 2.5%, then we would be seeing a respectable pace of real wage growth. We can hope for better, and also that we continue to see disproportionate growth at the bottom, but low unemployment and modest real wage growth is a pretty good picture.
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As Debt Ceiling Alarm Sounded, GOP Accused of Plotting 'Terrorist Attack on the Economy'
"They have the tiniest majority of one house and they are prepared to use it to get concessions they know are incredibly unpopular," one economist lamented.
Jan 13, 2023
As Treasury Secretary Janet Yellen warned Friday that the United States is likely to reach its arbitrary borrowing limit next week, progressives denounced congressional Republicans for threatening to use a debt ceiling standoff to force cuts to popular federal programs including Medicare and Social Security.
"They have the tiniest majority of one house and they are prepared to use it to get concessions they know are incredibly unpopular," Dean Baker, co-director of the Center for Economic and Policy Research, toldThe Washington Post. "It would be a terrorist attack on the economy."
Yellen announced that once the outstanding debt of the U.S. hits the statutory limit of $31.4 trillion—an event projected to happen on January 19—the Treasury Department will start repurposing federal funds to delay the date the government runs out of money. Until Congress raises the debt limit, the Treasury cannot borrow additional money, including to pay for spending that has already been authorized.
In a letter to congressional leaders, Yellen wrote that "the use of extraordinary measures enables the government to meet its obligations for only a limited amount of time," possibly through early June. She implored Congress to "act in a timely manner to increase or suspend the debt limit," warning that "failure to meet the government's obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability."
House Speaker Kevin McCarthy (R-Calif.) suggested—before the GOP won its slim House majority during November's midterms—that if elected to lead the chamber, he would refuse to lift the country's borrowing limit unless Democrats agreed to slash the social safety net and climate investments in return.
To secure enough votes to win his drawn-out battle for the speaker's gavel, McCarthy made undisclosed promises to far-right lawmakers, including several House Freedom Caucus members who have expressed opposition to raising the debt ceiling even if all of their demands, from shredding vital social programs to passing draconian immigration restrictions, were met.
\u201c\ud83d\udea8\ud83d\udea8 House Republicans plan to revive a key part of their failed 2017 attempt to repeal the Affordable Care Act as a debt limit demand, in addition to demanding Medicare cuts.\n\n"If you don't kick millions off their health care we'll wreck the US economy." https://t.co/bOsKydETAm\u201d— Rep. Don Beyer (@Rep. Don Beyer) 1673620603
The fight over the debt ceiling represents one of McCarthy's "most difficult balancing acts," CNNnoted recently. The California Republican will "need to work with Senate Democrats and President Joe Biden to cut a deal and avoid economic catastrophe without angering his emboldened right flank for caving into the left."
McCarthy told reporters Thursday that "he hoped to 'sit down with [Biden] early' to work through a number of outstanding fiscal issues, potentially including the looming need to raise the debt ceiling," the Post reported. "In doing so, McCarthy reaffirmed Republicans' interest in seeking an agreement that could cap spending in exchange for votes to address the country's borrowing cap."
"We've got to change the way we're spending money wastefully in this country," McCarthy said. "And we're going to make sure that happens."
Notably, Capitol Hill's deficit hawks do not support reducing the Pentagon's ever-expanding budget or hiking taxes on the rich to increase revenue. On the contrary, the first bill unveiled by House Republicans in the 118th Congress seeks to rescind most of the Inflation Reduction Act's roughly $80 billion funding boost for the Internal Revenue Service—a move that would help wealthy households evade taxes and add an estimated $114 billion to the federal deficit.
A 2011 debt ceiling standoff enabled the GOP to impose austerity and also resulted in a historic downgrading of the U.S. government's credit rating, but the country has never defaulted on its debt. Economists warn that doing so would likely trigger chaos in financial markets, leading to millions of job losses and the erasure of $15 trillion in wealth. Knowing that a painful recession is at stake, "many leading Republican lawmakers are demanding that their new House majority use the debt limit as leverage to force the Biden administration to accept sweeping spending cuts that Democrats oppose, creating an impasse with no clear resolution at hand," the Post reported.
\u201cThe debt limit isn't a credit card, it's authorization to pay the bills Congress already ran up without intentionally causing a job-killing recession.\n\nAnd the very first bill Kevin McCarthy's majority passed adds $114 billion to the deficit.\u201d— Rep. Don Beyer (@Rep. Don Beyer) 1673406153
According to CNN, some Republicans—fearful of both a disastrous default and political backlash for attacking popular programs—remain uneasy about using the debt ceiling as a bargaining chip,recalling how then-Rep. Paul Ryan's (R-Wis.) proposal to privatize Medicare "became fodder for attacks that depicted him rolling an elderly lady in a wheelchair off a cliff."
Sen. Elizabeth Warren (D-Mass.), however, has warned that GOP lawmakers desperate to win the White House in 2024 will "blow up the economy" and run ads blaming Biden for it.
The Biden administration on Friday urged Republicans to drop any plans they have to hold the nation's economy hostage, saying it has no intention to conduct debt ceiling negotiations and calling on lawmakers to raise the nation's borrowing limit to preserve its credit.
"We have seen both Republicans and Democrats come together to deal with this issue," White House spokesperson Karine Jean-Pierre told reporters. "It is one of the basic items that Congress has to deal with and it should be done without conditions."
In a joint statement, Senate Majority Leader Chuck Schumer (D-N.Y.) and House Minority Leader Hakeem Jeffries (D-N.Y.) said Friday that "a default forced by extreme MAGA Republicans could plunge the country into a deep recession… Democrats want to move quickly to pass legislation addressing the debt limit so there is no chance of risking a catastrophic default."
As many observers pointed out repeatedly in the aftermath of the midterm elections, Democrats had the power to prevent this high-risk game of brinkmanship from proceeding any further by raising the debt ceiling—or abolishing it altogether—when they still controlled both chambers of Congress.
Despite ample warnings from Warren and other progressive lawmakers and advocacy groups, conservative Democrats refused to take unilateral action during the lame-duck session.
In the absence of congressional action, Yellen—who has supported proposals to permanently eliminate the federal government's borrowing cap as most countries around the world have done—still has the authority to avert an economic calamity by minting a trillion-dollar platinum coin.
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US Jobless Claims Jump as Fed Shoves Economy to 'Precipice of Global Recession'
One expert called on Powell "to think twice before plunging our economy into a wholly avoidable recession and completely undoing one of the strongest job recoveries on record."
Oct 06, 2022
Labor Department data published Thursday showed that new applications for unemployment benefits jumped by 29,000 last week, a possible signal that the job market is slowing as the Federal Reserve continues to aggressively hike interest rates and brush off warnings of a devastating recession.
For the week ending October 1, total initial jobless claims were 219,000, more than analysts expected and up from 190,000 the previous week. The weekly increase in unemployment applications was the largest since June, according to the new federal numbers, though the job market remains strong overall for the time being.
"The last thing families need right now on top of high inflation is a recession."
Around 1.4 million people were receiving unemployment benefits as of the week ending September 24, the Labor Department said.
The unemployment figures were released a day ahead of the Friday publication of September's jobs report, which could provide a better indication of how the labor market is handling the Fed's efforts to curb inflation by tamping down demand--an approach that many economists have said is misguided and risks mass job loss.
During a press conference following the Fed's policy meeting last month--when the central bank opted to impose another large rate increase--Chair Jerome Powell acknowledged that rate hikes are likely to fuel a rise in layoffs but said "that is something that we think we need to have."
Mike Mitchell, director of policy and research at the Groundwork Collaborative, voiced his disagreement in a statement Thursday.
"The last thing families need right now on top of high inflation is a recession," said Mitchell. "Tomorrow's jobs report could show the early impacts of the Federal Reserve's aggressive rate-hiking approach."
"Continuing down this path risks leaving millions of people, disproportionately lower-wage workers and workers of color, without a job or with smaller paychecks," Mitchell added. "We urge Chair Powell to think twice before plunging our economy into a wholly avoidable recession and completely undoing one of the strongest job recoveries on record."
\u201cWorrisome uptick in new #unemployment claims +29K, after dropping in 5 of last 6 weeks, in advance of monthly jobs report tomorrow.\u201d— Andrew Stettner (@Andrew Stettner) 1665062506
The already-slim chances of the Fed engineering a "soft landing"--a sharp reduction in inflation without an accompanying recession--have dimmed further in recent weeks amid evidence that prices remain stubbornly high even as rate increases take their toll on the U.S. economy and ripple around the world, particularly in poor countries.
Powell's decision to risk a global recession to tame inflation has drawn growing criticism from economists in the U.S. as well as international institutions such as the United Nations, which earlier this week urged the Fed to stop raising interest rates.
Dean Baker, senior economist at the Center for Economic and Policy Research, also argued for a pause after the Fed's September meeting, warning that the central bank's policy approach risks "throwing the most disadvantaged out of work."
"When the Federal Reserve board hiked interest rates by another three-quarters of a point this week, the move was widely applauded by the business press. The rate hike showed the Fed's commitment to fighting inflation," Baker wrote in an op-ed for The Guardian. "While this is arguably true, it also showed the Fed's willingness to make the most disadvantaged groups pay the price for slowing a burst of inflation that they did not cause."
While some prominent members of Congress, including Sen. Elizabeth Warren (D-Mass.), have been sharply critical of the Fed's rate-hiking frenzy, progressive economists have voiced concern at the lack of pushback from lawmakers as the Biden administration stands by the central bank.
"I absolutely want my member of Congress weighing in on my behalf, saying, you know, 'Cool your jets, Powell. Like, step away from the bar, have a glass of water, and think this one through,'" Lindsay Owens, executive director of the Groundwork Collaborative, said in an interview with Marketplace on Wednesday. "Take a look at those JOLTS numbers we saw yesterday--huge drop in job openings. Maybe we can hold off for a minute on the next round of rate hikes."
"I think Powell's interest rate bender has us on the precipice of global recession," said Owens. "He is really going hard on rate hikes. And the consequences could be tremendous for so many."
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