Workers still needed, but cost increases going down. Why wouldn't the Fed want this to continue?

In a week filled with job and wage news, we started off with information that labor was still in very strong demand in America in September.

JUST IN: Job openings *INCREASED* in September to 10.7 million, a surprisingly strong result and up from 10.3 million in August.

The US has had over 10 million job openings for 15 straight months now.

Bottom line: The job market still looks strong. No sign of a recession there pic.twitter.com/MAnukDACYR

— Heather Long (@byHeatherLong) November 1, 2022

What an incredible run: The US has had over 10 million job openings for nearly 1.5 years.

Yes, it has slowed *a little*, but it's still strong.

Sept: 10.7 million
Aug: 10.3 million
July: 11.2 mil
June: 11 mil
May: 11.3 mil
April: 11.7 mil
March: 11.9 mil-->Record high

— Heather Long (@byHeatherLong) November 1, 2022

And layoffs continue to remain near 50-year lows, with the latest data coming today.

The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, suggesting the labor market remains strong despite slowing domestic demand amid stiff interest rate hikes from the Federal Reserve to tame inflation.

Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 217,000 for the week ended Oct. 29, the Labor Department said on Thursday. Data for the prior week was revised to show 1,000 more applications filed than previously reported. Economists polled by Reuters had forecast 220,000 claims for the latest week.

Though there has been an increase in layoffs in interest rate-sensitive sectors of the economy like finance, technology and housing, employers have generally been hoarding workers as labor remains scarce in some service industries.

All of that seems fine to me. And it portends for another month of decent job growth to be reported tomorrow, which would go on top of the 10 million jobs that have been added since Joe Biden took office in January 2021.

We also got some indications that the potential for a wage-price spiral lessened in recent months, as the Bureau of Labor Statistics released information on productivity and unit labor costs for Q3 today.

Unit labor costs in the nonfarm business sector increased 3.5 percent in the third quarter of 2022, reflecting a 3.8-percent increase in hourly compensation and a 0.3-percent increase in productivity. Unit labor costs increased 6.1 percent over the last four quarters….

Unit labor costs in the total manufacturing sector increased 3.8 percent in the third quarter of 2022, reflecting a 2.4-percent increase in hourly compensation and a 1.3-percent decrease in productivity. Manufacturing unit labor costs increased 4.3 percent from the same quarter a year ago.

Unit labor costs of under 4% seems pretty good, and in a non-rigged economy would mean that inflation should be settling down, since higher costs don’t have to be passed onto the consumer. (Although in 2022 America, it likely means the company uses these lower cost increases as a way to try to grab more profit).

In addition, that report from the Bureau of Labor Statistics showed that employee-related inflation wasn’t as bad in the first half of the year as originally reported. The bad news is that it was largely due to workers not getting as much as much as originally thought.

Nonfarm business sector productivity was not revised in the second quarter of 2022; a 0.2- percentage point upward revision to output was offset by a 0.2-percentage point upward revision to hours worked. (See table B1.) Second-quarter unit labor costs were revised down 1.3 percentage points to an increase of 8.9 percent, reflecting a 1.2-percentage point downward revision to hourly compensation. While hourly compensation increased 4.5 percent in the second quarter of 2022, real hourly compensation decreased 5.5 percent.

Manufacturing sector productivity was revised down 1.8 percentage points to an increase of 2.9 percent in the second quarter of 2022, reflecting a 0.4-percentage point downward revision to output and a 1.4-percentage point upward revision to hours worked. Productivity was revised down in both the durable and nondurable manufacturing subsectors. In the second quarter of 2022, total manufacturing unit labor costs decreased 0.7 percent rather than 0.2 percent as previously reported, reflecting a 2.3- percentage point downward revision to hourly compensation, which was partially offset by the 1.8- percentage point downward revision to productivity.

A similar story happened in Q1, with overall unit labor costs being revised down from an initially-reported 12.7% annual rate to 8.5%, and also seeing sizably higher revisions for hours worked in manufacturing. But also, the bad part is that real compensation in Q2 was well below the rate of inflation (-6.4% for nonfarm business, and -7.1% manufacturing).

The BLS says that hours worked in non-farm businesses grew in each of the first 3 quarters of this year, with the rate slowly decreasing as 2022 has gone on (+3.6% in Q1, +2.9% in Q2, +2.4% in Q3), which you would expect as unemployment falls to 3.5%. Isn’t this a sign that things are in a positive but less inflationary situation?

And given that unit labor costs have been getting under control, why would you want the Fed to screw up what seems to be a good situation for both workers and employers? But Fed Chair Powell seems determined to do so.

Fed Chair Powell says the labor market is still "overheated"

He wants to see:
-Job openings coming down a lot more
-Job quitting cooling down a lot more
-Wages "coming down" (i.e. not growing at 5%)

"It not obvious to me" that a softening is happening, he says

— Heather Long (@byHeatherLong) November 2, 2022

Hey Jerry, why don't you wait to see how the labor markets react to a 4% Fed Funds rate (a rate above the Q3 increase in unit labor costs), instead of continuing to jack rates higher to solve a “problem” that seems to be working itself out?

Or are the bankers worried that because job openings remain high and layoffs are staying low, that workers are going to be able to demand more of their share of the record profits they have helped produce in 2022? THE HORROR!