US unemployment rate rises and economists are thrilled

After months of speculating about out-of-control inflation, many mainstream economists had hoped that something would bring it down: more people out of work.

Higher unemployment means that employers don’t have to compete as much for workers, which can lead to higher wages and, conversely, inflation as companies pass costs on to consumers. used by raising prices.

On Friday, a major indicator pointed to exactly that.

The Bureau of Labor Statistics revealed in its most recent jobs report that US nonfarm payrolls added a modest 315,000 jobs in August. Many people are also actively looking for work, meaning the unemployment rate rose to 3.7%, a six-month high.

Economists are celebrating a paradox that is good news as more and more people are out of work.

“In our view, the August jobs report contains enough good news for the Fed that it should slow the pace of rate hikes starting in September,” wrote. Bank of America Study in a note shared on Friday.

Meanwhile, Julia Pollak, chief economist for job site ZipRecruiter, sent a note that sums up the observations of many economists like her, who closely follow each employment report: Unemployment figure is the best news for this data.

To understand why economists are cheering for an increase in the unemployment rate, you have to look back at the previous jobs report several weeks ago and Jackson Hole Economic Symposiumwhen Federal Reserve Chairman Jerome Powell spooked the stock market.

‘They will also bring some pain’

A month ago, the jobs report repeated in July showed that the US economy has 528,000 more jobshigher Analysts’ expectations. At the same time, the unemployment rate dropped to 3.5%, a level not seen since before the pandemic, and not much in the past 50 years. The thinking is: This means the economy is overheating and the Fed will have to raise interest rates to bring down inflation.

The major stock indexes fell on this news as investors anticipate further tightening. For example, the S&P 500 fell 0.1% and Nasdaq Aggregate decreased by 0.2%.

More painful is coming to equities, as Jerome Powell’s comments will soon spark another sell-off. “While higher interest rates, slower growth, and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” Powell said at meeting in Jackson Hole, one longstanding annual event where America’s central banks gather to set policy, shaping the global economy in the process. “These are unfortunate costs of reducing inflation.” S&P 500 and Nasdaq validdecrease in the next few days.

In other words, the rising unemployment rate would be confirmation that Powell’s harsh words have begun to do the trick. That’s something some economists have been advocating for months. “We need 5 years of unemployment above 5% to contain inflation – in other words, we need 2 years of 7.5% unemployment or 5 years of 6% unemployment or one year of unemployment rate. unemployment 10%,” Former Treasury Secretary Larry Summers said in June.

Several other economists point to the heavy costs that such high unemployment brings. William Spriggs, chief economist at AFL-CIO, says Luck it’s the equivalent of saying “We want people to lose their jobs [or] I want people not to be unemployed.” He added that the attitude of “the rest of us would be better off if we sacrificed these people’s incomes” entailed considerable suffering in a way that is not often discussed.

The market is most interested in the Fed and how much more the Fed will raise rates after Powell’s warning shot. Throughout the year, the Fed has increased several times, first by a modest 25 basis points in March, followed by a larger increase of 50 basis points in May. It then increased by 75 basis points for the whole of June. and July. The last time the central bank raised that much was in 1994.

Bank of America wrote that it expects further gains not to be too big following the “good news” from the August jobs report. It is expected to raise rates by 50 points in September, followed by 50. more points in November and 25 points in December.

“Risks to our outlook for Federal Reserve policy are more skewed towards rate hikes due to underlying dynamics in the US economy,” the bank wrote in its note. . “That said, based on all the data at hand since the last Fed meeting in July, we think the upside risk is more cumulative over time rather than a major rally. another 75bp in September”.

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