Better Than Expected Jobs Report Creates Market Chaos
The most recent jobs report stunned the financial world. 517,000 jobs added in January, more than double forecasts. Unemployment went down to 3.4%. That is its lowest level since 1969. While the administration touted their accomplishment, markets were thrown into turmoil.1
The Federal Reserve thinks inflation and the job market are joined at the hip. To them, a strong labor market requires more interest rate hikes. Economists think the connection between the two is broken. Nobel prize winning economist Peter Diamond said the Fed shouldn’t try to curb inflation by slowing down the labor market.2 The problem is that the Fed doesn’t realize the disconnect. As a result, the Fed may guarantee a recession by pushing interest rates to 6% or higher.
Economists are questioning the impact of the surprising job growth. The gains were all concentrated in a few industries – retail, temporary help, food service and public education. These typically drop off after a seasonal adjustment. But they seem to be sticking around. This is highly unlikely to continue into February. In addition, jobs may have been up, but wage growth slowed down.
New Rules for a New Economy
The post-covid economy is shattering rules. Falling inflation and falling unemployment should not exist. The Phillips curve is the economic term that describes the traditional relationship between inflation and unemployment. They are supposed to move inversely to each other. The curve is broken. Inflation has fallen from 9% in June to about 6.5%. The jobless rate has fallen from 3.6% to 3.4%.3
Some investors are hopeful that the broken curve means ongoing rate hikes won’t be as painful. They are buying into the storyline of steadily declining growth and inflation. Even Powell said that disinflation had begun. Yet, this could be wishful thinking after last year’s 19.4% plunge in stocks.4
Rate hikes have slowed. There have been eight straight increases since March 2022. The last one was down to one quarter point. The jobs report could throw gasoline on the inflation fire. The Fed may react by increasing rates by more for longer. Powell himself was quite clear in saying that increases will continue until inflation goals were met. He is focused on an “out of balance” labor market.
The Fed and investors are both trying to navigate thru this uncharted economic fog. The only certainty seems to be that confusion breeds volatility. No one can accurately predict where markets will wind up. This wealth of ignorance can deplete your wealth if you don’t plan accordingly. Investors should look at safe have assets that preserve value no matter which way the economic winds blow. The Gold IRA from American Hartford Gold can do just that. Contact us today to learn more.