A Thaw In U.S. Jobs Market Could Be Good News For Fed's Inflation Battle

It was just a hint of something good on the horizon, Richmond Federal Reserve President Thomas Barkin said this week, but in his recent conversations with business officials they have been suddenly upbeat about the number of applicants for open jobs.

He wasn't ready to call it a trend, but "you can hear the first glimmers of the labor market starting to ease," Barkin told a Baltimore business group. It's an observation that if it holds up could mean the pandemic backlog of too many open jobs and too few workers may be on the verge of thawing, with implications for the path of inflation, wages, and the Fed's own policy debates.

Employment data released on Friday showed that glimmer may in fact be a bright light and the first solid evidence the Fed has had in recent months that some of the key economic aftershocks from the pandemic are starting to wane.

Workers did in fact surge into jobs: Firms added 678,000 new positions, and the unemployment rate fell to 3.8%.

But just as notably for the Fed wages were flat, relieving fears of an inflationary "wage price spiral" and redeeming somewhat the Fed's hope that over time workers would set aside their pandemic fears, find ways around childcare or other constraints, and return to work.

The employment-to-population ratio, watched by many Fed officials as an overall barometer of labor market health, rose again, to 59.9%, and is now just 1.3 percentage points below where it was before the pandemic; an additional 300,000 people were either working or looking for work in February versus the month before, and the labor force has now grown by 2.3 million in the last five months - the type of net flow back into work or jobseeking officials have been waiting for.

Pandemic fiscal support for households has now largely expired with the end of childcare tax credits in January, wages are higher than they were, and businesses have reported using a variety of incentives like benefits and more flexible work arrangements to fill jobs with employees who have become more selective about working conditions.

"If we see more numbers like this moving forward, we can be optimistic about this year," said Nick Bunker, research director at job site Indeed, who noted that many core labor market statistics are in striking distance of where they were before the pandemic. The total number of jobs is just 2.1 million below February 2020, a gap that could be filled by the start of summer at the current pace of hiring; the unemployment rate is just three-tenths of a percentage point higher; and the number of unemployed, at 6.2 million, is just around half a million more than before the pandemic.

It wasn't time yet to declare the labor market healed from the pandemic, Labor Secretary Marty Walsh said in an interview.

"We still have work to do," he said noting the still- elevated Black unemployment rate of 6.6%.

But he also predicted that within the year some of the pandemic-related gaps will have closed and "we will be back to normal job day numbers."

NORMALIZATION THE 'TOP PRIORITY'

The employment report for February likely keeps intact the Fed's current plans to raise interest rates at its meeting in two weeks to confront high inflation. Fed Chair Jerome Powell said he would support an initial 0.25-percentage point increase from the current near-zero level, with more increases expected during the year.

But it may also give some relief, at least for now, against calls for faster or bigger rate hikes. The last few job and inflation reports showed both prices and wages accelerating, and pushed the Fed's current policy - crafted to battle the pandemic - further out of step with a quickening economic rebound.

The pause in wage increases coupled with strong hiring and a growing labor force showed a dynamic at work that policymakers hope will take root across the economy: Improvements in the supply of goods and services, in this case labor, helping meet strong demand without excessive price hikes.

The war in Ukraine has added a new layer of uncertainty to the outlook, as Powell noted in congressional testimony this week.

Analysts noted as well that overall hiring remains so strong that one month of flat wages may not mean much. The annual increase remains a robust 5.1%.

"We are inclined to look through the reported wage weakness," wrote Jefferies Chief Financial Economist Aneta Markowska. "The labor market is hot and inflation is likely to accelerate" to perhaps as high as 8% by March from 7.5% in January.

"Policy normalization remains the top priority for the Fed," she said.

The employment data arguably showed a step back towards normal, with job gains spread widely through the economy, including in some of the service industries most harmed by the pandemic. A broadening set of industries have fully rebounded to pre-pandemic employment levels, with the hardest hit leisure and hospitality sector still 9% below but improving.

High frequency data have shown steady improvement as well with momentum for more to come. Air travel has been on the rise as has in-person restaurant dining, bellwether activities marred for two years by fears of the virus.

Payroll manager UKG said recent shift data showed the impact of January's Omicron wave, which had kept millions of workers off the job at its peak, had all but faded, and that employment gains seemed to be gaining steam in the most troubled sectors.

"It's very clear that people are increasingly coming off the sidelines," wrote UKG Vice President Dave Gilbertson.