![]() Firms that feared they couldn’t hire the workers they wanted were loath to let anyone go. One remarkable feature of the labor market in 2021 and (much of) 2022 was the exceptionally low level of layoffs. As restaurants have caught up (somewhat) on staffing, their desperation-and with it, the wage surge-has eased. ![]() The frenetic pace at which firms were trying to bring on workers has moved down as panic over missing out on demand has ebbed. Some labor was reallocated, some jobs were filled by new workers, and some jobs were determined to be unneeded each allowed the labor market to ease in the face of strong labor demand.Ĭan the second stage of a soft landing succeed? What would it take to continue to beat the odds and let the economy escape recession in 2023? Optimists can pin their hopes on several labor market dynamics that we find encouraging.įirst, the intensity of hiring has slowed. The first stage of the inconceivable soft landing has played out: Job openings fell, wage growth moderated, while the unemployment rate actually dropped to a multigenerational low. However, the second half of 2022 clearly contradicted that. history, falls in job openings are mirrored by rising unemployment, which is the only certain arbiter of recessions. Larry Summers wrote in early June 2022 “that bringing down job openings without increases in unemployment is at odds with both economic theory and the empirical evidence.” And it is certainly true that in U.S. A better reason for optimism: The labor marketĪ soft landing has been widely dismissed by leading doomsayers. But it’s the latter that needs to fall convincingly.Ī durable reduction of core inflation requires a meaningful moderation in wage growth- despite tight labor markets. The quality problem will be clear in the middle of 2023 when headline inflation will likely fall below core inflation. ![]() Rather, it’s driven by sharp idiosyncratic falls in durable goods and energy. ![]() And much of the fall so far is not of the highest quality. It’s not just the size or speed of the fall-the quality of disinflation also matters to get monetary policy to ease. While those plans can change, with the most serious challenge to the inflation regime in decades and reputations to defend, central bankers are less likely to fold to fears of economic weakness than in the past. The Fed itself has said clearly that it expects to keep the policy rate above 5% at the end of 2023 even as it expects inflation to slow sharply to 3.1%. Of course, falling inflation is important and welcome, but it is unlikely to lead to a loosening of monetary policy in 2023. In fact, just as the fearful narratives of a 1970s-style regime break were overdone on the way up, now the significance of falling inflation is also overstated. The recent euphoria about inflation’s peak and fast fall, which was widely predicted but delayed due to energy shocks, does not make for a well-grounded soft-landing argument. There is no guarantee the journey to such a graceful easing continues in 2023-let alone that policy can begin to normalize in 2024-but optimists can credibly pin their hopes on several labor market dynamics this year. ![]() The first stage of a soft landing is playing out as job openings have eased while unemployment fell. Yet that is precisely what has been happening. Prominent naysayers, such as Larry Summers, all but ruled out a soft landing last June. Think of it as a successful reallocation of labor from weak sectors to stronger ones. Even with high interest rates or slower-than-expected disinflation, a soft landing may remain on track if wage growth eases and overheated job openings fall without pushing up the unemployment rate. Rapid disinflation, widely predicted and likely to continue, will not be enough to unwind tight monetary policy, which is driving recession risk.Ī better reason for soft-landing optimism is the labor market and, critically, slowing wage growth. Having emphasized the economy’s resilience throughout last year, this shift in sentiment is warranted in our view, but the new optimism should be for the right reasons. ![]()
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