WELL-BALANCED — You wanted the perfect Goldilocks jobs report — not too hot, not too cold? Well, you pretty much got exactly that in December with hiring still quite strong at 223,000 but slowing down a bit with wage gains easing. The jobless rate ticked back to a forty-year low of 3.5 percent, the Labor Department said today, as nearly half a million Americans returned to the labor force. That means, at least for the moment, that the fabled and rarely achieved economic “soft landing” — in which the Federal Reserve’s campaign of rate hikes cools off inflation but doesn’t tip the economy into recession — is still very much a possibility, if a fairly narrow one. And the new economic conventional wisdom that any recession would probably be short and shallow looks like it could actually be correct. To be clear, a foam-the-runway style, fiery crash landing remains quite possible. But as the new year begins, it’s no longer fashionable to be an economic doom-and-gloomer. And with pretty good reason. Just look at the numbers. Job gains are now at their lowest point in two years as the flood back from Covid runs its course and Fed hikes start to pinch businesses and limit hiring plans. But they are still quite strong. That’s great from a Fed perspective. And the central bank’s biggest concern, a wage-price inflation spiral in which ever-rising compensation forces companies into more and bigger price hikes on consumer products, does not appear to be happening. The Fed — and American workers — love wage gains. But not if they run out of control and drive up overall consumer inflation. And in December, wages ticked up 0.3 percent on a monthly basis, less than what Wall Street forecast. Wages are now up 4.6 percent on an annual basis, down from a March peak of 5.6 percent. In the short term, this is rough for workers as it now means their pay hikes are again being entirely eaten up by inflation. Still, it’s good news for the Fed. Chair Jerome Powell and his central bank colleagues can now point to some pretty concrete signals that the hot labor market is finally cooling a bit. While still high, wage gains are slowing down, which is exactly what the Fed wants to see. And nearly half a million Americans rejoined the workforce in December, perhaps a signal that depleted Covid-era savings are finally forcing people back into jobs. That good news for the Fed could lead to a smaller rate hike of just a quarter point next month. And that, in turn, meant good news for Wall Street, with all major averages jumping around 2 percent on the news. Big Wall Street banks are mostly no longer calling for an imminent recession, though risk levels remain high. Instead, what appears to be happening at the moment is the American economy is very slowly starting to resemble what it was before Covid: slow growing, plagued by inequality and other systemic issues but generally… basically pretty OK. The “Goldilocks” analogy — cliche though it is — dripped from nearly every economist’s lips today. And the report came as strong news for Democrats and President Joe Biden as their argument — that the president’s big fiscal and social policy wins from the last two years will help avoid recession — now appears to have some more merit. But, but, but … and you knew this bit was coming. It’s not like a soft-landing is a lock, or the economy is fully healed from Covid. There are already significant layoffs in the interest rate sensitive technology and financial services sectors as companies prepare for a Fed-dampened economy. Temporary help has fallen by 110,000 over the past five months. New orders for manufactured goods dropped by 1.8 percent in November, the Commerce Department said, well above the expected decline. “The third straight hefty drop in temp hiring, down 35,000, is an ominous sign,” Pantheon Macroeconomics’ chief U.S. economist Ian Shepherdson wrote in a client note today. “We think substantially slower payroll growth is coming very soon.” And a business survey on activity in the services sector showed a decline in December for the first time since early in the pandemic. The labor force is still 2.6 million people smaller than it was before the pandemic. And it was already way too small. That means continued pressure on wages until more people get back to work. While encouraging for the Fed, wages are still growing faster than they would like — as is overall inflation. If current trends don’t continue on inflation, the central bank will absolutely err on the side of sparking recession with more big hikes. So keep the cigars unlit for now. Welcome to POLITICO Nightly. Contact tonight’s author at bwhite@politico.com or on Twitter at @morningmoneyben .
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