The Cooling Economy

https://www.nytimes.com/2022/10/10/briefing/economy-jobs-inflation.html

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Keeping track of the U.S. economy can sometimes feel a bit like watching an action movie through a magnifying glass: lots of movement and flashing lights, but it’s hard to figure out what’s going on.

More often than not, the relevant data is a jumble of conflicting signals. Take the jobs report released on Friday. The unemployment rate fell, but the labor force shrank. Job gains slowed, but wage growth remained high. The report mostly met analysts’ expectations, yet the stock market tumbled.

In times like these, it can help to put down the magnifying glass to look at the bigger picture. The bottom line: The job market is cooling, but it remains strong, and while a recession remains a real possibility, there’s little sign of it yet in the data.

Before we dive into the latest data, it’s worth reflecting on just how far the job market has already come in the past two-plus years. The U.S. economy lost an astonishing 22 million jobs in the first two months of the pandemic. It has gained them all back, plus half a million more. After the previous recession, it took more than five years to achieve that feat.

The pandemic left a lasting mark on the U.S. economy. More people are working in warehouses today than in February 2020, and fewer in restaurants. Child care remains in short supply, forcing some parents — a disproportionate share of them women — to work part-time or not at all. “Long Covid” is also clearly keeping some people out of work, although researchers have come up with different estimates of how many.

But, for the most part, the labor market appears to have avoided the deep scarring that was the legacy of the last recession. Long-term unemployment is as low as it has been in 20 years. The overall unemployment rate hasn’t been lower than this since the 1960s. Defying claims that “no one wants to work anymore,” 80.2 percent of Americans in their prime working years had jobs in September, above the rate in the year before the pandemic.

Getting there has been bumpy. As vaccines became widely available and businesses reopened last year, employers suddenly had more jobs to fill than applicants available to fill them. That was good news for workers, who were able to jump between jobs and negotiate for higher pay. But it almost certainly helped feed into inflation, as businesses raised prices to cover higher labor costs.

The labor market was always bound to cool off eventually. Almost no one thought that furious hiring pace was sustainable long-term. Now, the cool-down is clearly underway. Hiring is slowing. Job openings are falling. Fewer people are jumping ship to other employers.

But the job market is hardly nose-diving. Even though the total of 263,000 jobs added in September was the lowest in more than a year, it was still a healthy gain. Layoffs remain extremely low; fewer people are getting jobs, but we haven’t seen any meaningful increase in the number of people losing them.

Again, it’s easy to get lost in the details. Different measures of wage growth tell somewhat different stories. The same is true for job openings. And there are real and difficult questions about what is happening beneath the surface and why. But the basic story of a gradual slowdown is consistent across almost all the data we have available.

Ordinarily, economists think of faster job growth as better. But the situation right now is more complicated. As my colleague German Lopez explained in this newsletter last week, the Fed has concluded that the job market is overheated and that the only way to bring down inflation is to cool it off. The question is how much pain it has to cause to get there.

There are two stories you can tell about the labor market right now. In the first, more optimistic, version, the gradual slowdown is akin to a healthy release of pressure. Employers have become a bit less eager to hire. Employees have become a bit less confident in their ability to demand raises. That will result in slower wage growth, which should allow the Fed to be more patient and less likely to slam the brakes on the economy.

The second version is darker. In this telling, the Fed has already been hitting the brakes pretty hard — five rate increases this year, including three supersize hikes in a row — and the job market has only just begun to slow down. Wage growth is still well above what the Fed considers consistent with its goal of 2 percent inflation. If policymakers want to get it down further — and indications are that they do — they will have to get even more aggressive, even at the risk of putting more people out of work.

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Matthew Cullen, Lauren Hard, Lauren Jackson, Claire Moses, Ian Prasad Philbrick, Tom Wright-Piersanti and Ashley Wu contributed to The Morning. You can reach the team at themorning@nytimes.com.