Continued Interest Rate Increases and Low Unemployment Paint a Complicated Picture

Since 2022, the labor market's response to higher interest rates has been very unexpected. Normally, higher rates lead to higher unemployment since individuals spend less, creating less revenue for businesses, which causes layoffs. In reality, recent labor market trends have shown the opposite. Because of this, the unemployment rate will demand attention from economists and investors alike for the remainder of the calendar year.

Fed Quarter-Percent Interest Rate Hike?

On Wednesday, February 1, 2023, the Federal Reserve convened and announced a much anticipated 25 basis point increase. This raise follows six previous consecutive raises seeking to combat the record 40-year high inflation rate last year. The Federal Reserve is currently favoring slower rate rises in anticipation of the lagging effect of rate hikes. In the wake of key indicators for inflation such as wage and price growth peaking, Fed Chair Jerome Powell remains wary. “We’re going to be cautious about declaring victory and sending signals that we think that the game is won” (Timiraos).? Since Fed officials met in December, economic activity has varied. The unemployment rate in December measured 3.5%, the lowest seen in half a century. Additionally, consumer spending has returned to a more regular amount, while manufacturing activity has largely diminished (Timiraos). Even with slower raises in inflation, prices have continued to change. The decrease in demand reflects the uncertainty of many consumers. Overall, inflation is dropping due to falling prices of energy and other goods.

Labor Market and Unemployment

As previously mentioned, the unemployment rate in December 2022 came in at 3.5%. Recent data has revealed a further drop in unemployment, with last week’s job report announcing a rate of 3.4% in January. This marks a new 53-year low, accompanied by the addition of 517,000 jobs (Harrison). Despite the new job gains, wage growth slightly weakened last month. In December, average hourly earnings grew an estimated 4.8%, while January saw earnings grow 4.4% from a year earlier. What’s more, the average workweek is now at 34.7 hours, marking a high point since March of 2022 (Harrison). Kathy Bostjancic, Chief Economist at Nationwide, said “This is just incredibly, surprisingly strong. Not only are you hiring more workers but the workers you have overall are working more hours. It doesn’t really get stronger than that” (Harrison).?

Preparing for a Recession

‘Recession’ has been the big word on the street since early 2022. According to a survey conducted by the Wall Street Journal, economists predict a recession for the United States this year with 61% confidence, albeit a brief event (Harrison). This comes in spite of the extremely strong and tight labor market 2023 has brought. In anticipation of this untimely potential incident just a few short years after a historic economic downturn, many states are beefing up their cash reserves. These reserves fuel public programs and services when unexpected reductions in state revenue occur. Notably, these funds have increased just over 1.7% throughout the country this year, amounting to $136.8 billion (Harrison). Federal stimulus money and post-pandemic economic recovery are to thank for this growth. In an estimate from Moody’s Analytics, 39 states would be able to endure “a relatively mild recession” given such financial preparation (Harrison). Although the public should be wary of potential economic woes, state governments have done much in their power to mitigate any functional distress to essential services local communities rely on.

Written by

Jacob Ober

Seth Gunzburg

Jerod Osika

February 6th, 2023

Binghamton University

Financial Literacy for the Youth

Works Cited

Harrison, David. “States Are Flush with Cash, Which Could Soften a Possible Recession.” The Wall Street Journal, Dow Jones & Company, 5 Feb. 2023, www.wsj.com/articles/states-are-flush-with-cash-which-could-soften-a-possible-recession-11675544984?mod=economy_lead_pos1.?

Harrison, David. “Unemployment Falls to 3.4%, Lowest in 53 Years, Jobs Report Shows.” The Wall Street Journal, Dow Jones & Company, 4 Feb. 2023, www.wsj.com/articles/january-jobs-report-unemployment-rate-economy-growth-2023-11675374490.?

Press, The Associated. “U.S. Job Openings Hit a Record in June; Hiring Picks Up.” Oregonlive, 9 Aug. 2021, www.oregonlive.com/business/2021/08/us-job-openings-hit-a-record-in-june-hiring-picks-up.html.?

Timiraos, Nick. “Fed Slows Its Tightening with Quarter-Point Interest Rate Rise.” The Wall Street Journal, Dow Jones & Company, 3 Feb. 2023, www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increases-likely-11675278190.?