Can The Machine Continue Humming?

The employment sector of the economy has been nothing short of amazing. Close to full employment, we lost an amazing number of jobs during the pandemic – close to 25 million. By July of last year, we had recovered those jobs and it was expected that the pace of job creation would slow down from that point on. And the pace did slow down a bit towards the end of 2022, though the job market stayed stronger than normal.

We turned the page to 2023 and what happened? The economy created approximately 800,000 jobs in the first two months of this year, significantly out pacing expectations. At this juncture, we have to ask this question—how long can the employment machine create these many jobs with the unemployment rate again nearing full employment levels? Logically, we should see job creation slow to the point that we are just replacing jobs lost and accommodating population growth.

Thus, the March employment report to be released this Friday will be watched with great anticipation – together with the measure of wage inflation. Again, logic says that wage inflation will not slow down until the jobs machine slows. And if wage inflation continues, the Federal Reserve will have no choice but to continue to raise rates and keep them higher for a longer period of time — which would be very problematic for them considering the current weakness in the banking sector.  Very few times in our history we have been rooting for the economy to create fewer jobs. But if we want lower interest rates, this is the path we must follow.