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Economists Anticipated a Hiring Slowdown. So much for that

Jobs and wage growth remain strong, defying expectations as the Federal Reserve works to slow the economy, leaving policymakers and forecasters surprised.

Job growth remains rapid, unemployment is hovering near historic lows, and wage increases are strong, even as the Federal Reserve’s nearly two-year effort to cool the economy through higher interest rates continues to unfold — an outcome that has caught policymakers and economic forecasters off guard.

A year ago, Fed officials had projected unemployment to rise to 4.6 percent by now. Instead, it remains notably lower at 3.7 percent.

For months, central bankers have reported hearing anecdotal signs of a slowing labor market. The Fed’s Beige Book, which compiles reports from across the country, has suggested that hiring is modest or even stagnant in some regions. While hiring did slow somewhat last year, significant cracks in the labor market have yet to appear in the data.

In fact, evidence suggests the labor market remains robust — a point that Jerome H. Powell, the Fed chair, acknowledged this week.

“We’ve had a very strong labor market, and we’ve had inflation coming down,” Mr. Powell noted. “A year ago, we thought some softening in the economy would be necessary, but that hasn’t been the case. We view stronger growth not as a problem.”

Mr. Powell and his colleagues believe the labor market has found a better balance, aided by a recovery in the supply of workers. This improvement has been supported by increased immigration and a rise in labor force participation. Meanwhile, job openings have gradually declined.

However, the persistence of robust job gains amid high interest rates has surprised many economists. Early last year, predictions of an economic slowdown — and even an outright recession — were widespread, yet these forecasts have not materialized.

For the Federal Reserve, the key question is what happens if the labor market defies expectations and begins to accelerate instead of slowing down. While one month of data doesn’t establish a trend, officials are likely to monitor hiring and wage growth closely.

Mr. Powell emphasized that strong growth wouldn’t inherently concern the Fed or prevent a potential reduction in interest rates this year, provided inflation continues to decrease. However, if robust wage increases and economic strength lead to sustained consumer spending, it could give businesses the ability to keep raising prices — a scenario that could prompt more caution from central bankers.

“If there were genuine concerns about a re-acceleration, it might prompt the Fed to pause,” said Kathy Bostjancic, chief economist at Nationwide. “But at this point, they’re more likely to respond to signs of a weakening labor market than to ongoing strength.”

Source: https://www.nytimes.com/2024/02/02/business/job-growth-economy-expectations.html?searchResultPosition=21#

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