After a week of ups and downs in the stock market, investors on Friday largely ignored a new Labor Department jobs report for April, and the Dow Jones and Nasdaq both closed slightly lower. Such a reaction was surprising, as the report contained positive news on inflation, which has been the main thing that has spooked investors recently. Wage increases, which play an important role in determining the longer-term rate of inflation, moderated last month. “The three-month annualized growth rate of [average hourly earnings] now stands at just 3.7%, the lowest since March 2021, and down sharply from 6.3% as recently as November last year,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a report to clients.
In the short term, this decline in wage growth is not great for workers, many of whom have seen their incomes fall short of rising prices since last year. But, if the moderation in wage inflation persists, it would calm fears surrounding the emergence of a 1970s-style wage-price spiral, which Republicans have played on and some investors have panicked. It would also increase the chances that the Federal Reserve – which raised interest rates earlier this week by half a percentage point – will reduce inflation without creating a recession that workers would bear the brunt of first.
A prominent economist who has sounded the alarm over soaring prices said the new wage figures prompted him to edge slightly closer to the view that rising inflation is a transitory phenomenon. “I rarely change my view on the economy much based on a single data release, but this one moved me more than any data point in general,” said Jason Furman, a Harvard economist who headed the White House Council of Economic Advisers. during the Obama administration, wrote in a group email. In a blog post, Furman and a colleague, Willie Powell, said the new wage data report “raises the possibility that nominal wage growth in 2021 was boosted by one-time post-pandemic factors.” They added: “More data will be needed, however, before we are at all convinced that this is the case.”
That’s a good point. Some economists have played down the lower wage increase figures in the New Jobs report, saying they don’t necessarily amount to much. “On the surface, wage gains have slowed,” Aneta Markowska and Thomas Simons, two economists at investment bank Jefferies, wrote in a note to clients. “However, the slowdown was driven by bizarre wage declines in retail and utilities. All other sectors have seen stable or faster wage inflation, so there is no evidence of a generalized slowdown.
The inflation debate will not be resolved for some time. Its persistence could ultimately depend on unpredictable factors, such as the outcome of the war in Ukraine and the longevity of China’s current coronavirus lockdowns. But more good news is possible next week, when the Department of Labor releases the consumer price index for April. The inflation rate, which was 8.5% in March, could well drop a little. Over the past month, energy prices have remained relatively stable. Additionally, the cost of used cars, which was a major factor in last year’s initial inflation spike, is now falling. “April will be the first month that headline inflation drops, to 8.0 or 8.1%,” Shepherdson told me. This result would not represent a huge drop, and inflation of 8% would still be a very high rate by recent standards, but Shepherdson predicts that it will continue to fall this summer.
The jobs report also contained good news on job growth. Non-farm employers added four hundred and twenty-eight thousand jobs in April, bringing the total number of new jobs created so far this year to more than two million. This should calm fears that the US economy is stumbling. Those concerns were heightened late last month by another report from the Commerce Department, indicating that gross domestic product, the economy’s broadest measure of output, fell slightly in the first three months of 2022. Economies that are in serious trouble, however, don’t consistently create large numbers of jobs month after month. As I wrote after the GDP report came out, this was almost certainly an anomaly.
Overall, the jobs report indicates that the economic recovery from the pandemic remains on track. He also suggested that some of the recent inflationary pressures may be starting to ease. After all the angst of the past few months, it was encouraging to have some positive news on this front, although its ultimate meaning is still up for debate.