The current state of the U.S. job market presents a complex picture shaped by several factors, including productivity growth and labor force changes. With varying perspectives from economic advisers and Federal Reserve officials, understanding the implications for future policies is crucial.
WASHINGTON, Feb 9 (Reuters) – On Monday, Kevin Hassett, an economic adviser at the White House, indicated that job growth in the U.S. may slow in the upcoming months. This projection stems from a combination of a decelerating labor force growth and rising productivity, which are significant factors in a broader discussion at the Federal Reserve, influencing its upcoming policy decisions.
In the months of November and December, the average monthly payroll employment increased by just 53,000 jobs. This is a stark contrast to the pre-COVID average gain of 183,000 jobs per month recorded over the previous decade and significantly less than the surge in employment seen during the latter years of the Biden administration.
Interestingly, a portion of this job growth had been fueled by an influx of workers owing to a more lenient immigration policy, a strategy that President Donald Trump has since reversed. This reversal complicates economists’ attempts to ascertain whether the slowing labor market is a consequence of economic weakness or an actual shortage of workers available to fill existing roles.
Hassett, who heads the National Economic Council, proposes an alternative explanation: the increased productivity per worker. He suggests that even with a constrained workforce, the economy can still expand as productivity soars. In an interview with CNBC, he stated, “The combination of strong GDP growth and a significant decline in the labor force—due in part to undocumented migrants leaving the country—could result in lower job figures. Therefore, one should anticipate smaller job numbers, which can still align with current high GDP growth.” He emphasized that there is no need to panic if we observe lower job figures, as this reflects a decline in population growth against a backdrop of skyrocketing productivity—a unique scenario.
The Labor Department is set to release its delayed employment report for January on Wednesday, with economists from Reuters projecting an increase of around 70,000 nonfarm payrolls, following a gain of 50,000 jobs in December.
As for unemployment, the rate stood at 4.4% in December, and economists expect it to remain stable for January.
FED OFFICIALS OPEN TO PRODUCTIVITY ARGUMENT
The remarks made by Hassett resonate with comments from Fed Chair Jerome Powell during a recent press conference, following the central bank’s latest policy meeting. Powell noted that U.S. policymakers face a “very challenging and quite unusual situation,” characterized by declining demand for and supply of labor.
This scenario aligns with both slowing job growth and a stable unemployment rate. Powell elaborated that this creates “a difficult time to read the labor market,” as the Fed’s response may vary based on whether supply or demand is primarily limiting job creation.
If job supply is restricted due to deportations of potential workers, it could lead to hiring challenges and wage increases—factors that could contribute to inflation and prompt the Fed to approach rate cuts cautiously.
Conversely, if the cooling job growth stems from weak demand, it may compel the Fed to lower interest rates in an effort to boost economic activity and hiring. Trump has criticized Powell and the Federal Reserve for not implementing the aggressive rate cuts he believes are necessary to stimulate the economy.
Similarly to Hassett, Fed chief nominee Kevin Warsh, recently appointed by Trump to replace Powell in May and awaiting Senate confirmation, has also posited that rising productivity could put a lid on inflation, influencing the central bank’s policy outlook.
While Powell and many Federal Reserve policymakers are receptive to the idea that robust productivity growth might continue, they remain hesitant to make short-term monetary policy decisions based on speculative growth.
Dario Perkins, managing director of global macro at TS Lombard, asserts, “The demand versus supply question is critical for monetary policy. If it’s demand, then the Fed needs to intervene. If it’s supply, inflation will be more persistent, suggesting the Fed should maintain its stance.” However, he cautions that there is already considerable demand stimulus in the pipeline. If supply is limited, this could pose challenges.
Reporting by Doina Chiacu and Howard Schneider; Editing by Paul Simao
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