The U.S. added 353,000 jobs in January, almost double the 185,000 economists expected, as the economy walks the tightrope of maintaining a strong labor market while simultaneously bringing down inflation to a palatable level. The unemployment rate stayed flat at 3.7 percent.—Forbes, February 2, 2024
Why did the unemployment rate stay flat when employment increased?
The Bureau of Labor Statistics (BLS) measures unemployment using household data from the Current Population Survey (CPS), and the unemployment rate equals the number unemployed as a percentage of the labor force, and the labor force equals the number employed plus the number unemployed.
This table shows the CPS data, which says the unemployment rate remained constant.
The news story says the economy added 353,000 jobs in January but the CPS data in the table say employment decreased by 31,000. Why the difference?
The answer is that the BLS conducts another survey, the Current Employment Statistics (CES) survey. The CES counts the number of jobs, not the number of people employed, and some people have more than one job. This table shows the CES data, which says the number of jobs increased by 353,000.
What is a strong labor market?
The labor market is strong when it is creating more jobs than the number of people to fill them is growing, and the unemployment rate is at or below the natural unemployment rate, its long-term average. The current unemployment rate at 3.7 percent is well below the long-term average of 6 percent and indicates a very strong labor market.
What was the inflation rate in December 2023, and what is a palatable level of inflation?
The inflation rate, measured as the year-on-year percentage change in the core personal consumption expenditure price index (core PCEPI), was 2.9 percent per year in December 2023, down from 4.9 percent a year earlier. The Fed’s inflation target for the core PCEPI, what the story calls a palatable level, is 2 percent per year.
What is the tightrope the economy walking on?
The economy is walking a tightrope that returns inflation to target while avoiding recession. Falling off the rope on one side brings persistent or even rising inflation, and falling off to the other side brings unemployment and recession. The Fed is trying to avoid falling off in either direction.
How do we illustrate the economy’s tightrope?
We illustrate the economy’s tightrope with the short-run Phillips curve, the relationship between inflation and unemployment, holding constant the expected inflation rate and the natural unemployment rate. In January 2021, the actual and expected (core PCEPI) inflation rate was 2 percent per year, the actual and natural unemployment rate was 6.5 percent, and the short-run Phillips curve was SRPC0 in Figure 1.
The vertical long-run Phillips curve, LRPC0, shows that in the long run, the unemployment rate equals the natural rate of unemployment.
By February 2022, inflation had increased to almost 6 percent per year and unemployment had fallen to below 4 percent. The natural rate of unemployment had also fallen to around 3.5 percent and the long-run Phillips curve had shifted leftward to LRPC1.
The Fed started its tightrope act in 2022 with a series of large and rapid interest rate rises that lowered both the actual and expected inflation rates. And as the expected inflation rate fell, the short-run Phillips curve shifted downward. By December 2023, it had become SRPC1.
Figure 2 shows the outbreak of inflation in 2022 and the Fed’s two years of success on the tightrope.
Although the Fed has lowered inflation from 6 percent to 3 percent without increasing the unemployment rate, continued high interest rates to lower the unemployment rate further to 2 percent are likely to raise it. And an increase in the unemployment rate will bring the temptation to lower interest rates prematurely, which risks a new outbreak of inflation.
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