Jobs Growth Is the Savior of Inflation-Wracked US Economy

A monthly inflation report due Wednesday from the U.S. Labor Department could add pressure on the Federal Reserve to keep tightening monetary policy – even as some forecasters see the economy hurtling toward recession.

The U.S. Consumer Price Index (CPI) is predicted to rise 8.8% in June from 12 months earlier, based on the average estimate of economists surveyed by FactSet. That pace would represent an acceleration from the pace recorded in May, when inflation jumped to a fresh four-decade high of 8.6%.

Economists’ forecasts were way off the mark in advance of May's report when they predicted inflation had declined from the previous month. The numbers released showed that price pressure actually accelerated, sending shock waves through the markets because it meant the Fed would have little choice but to proceed with a swift increase in interest rates. (The following week, the U.S. central bank raised rates by 75 basis points, or 0.75 percentage point – three times the usual increment.)

If this week's CPI number comes in high, the Fed likely will continue to hike rates aggressively, meaning 50 or 75 basis points.

This is bad news for bitcoin (BTC), which is down nearly 70% since inflation started accelerating post-pandemic in October 2021, showing the effect that macroeconomic circumstances have on the crypto markets.

In fact, the U.S. is already in a recession judging by one widely used definition: two consecutive quarters of contraction in gross domestic product. The first-quarter GDP shrank by 1.4%, and it likely declined more in the second quarter, according to the Federal Reserve Bank of Atlanta’s GDPNow tool.

However, the organization responsible for declaring and dating recessions, the National Bureau of Economic Research (NBER), sees things a little differently. According to the NBER, a recession involves “a significant decline in economic activity that is spread across the economy” and lasts over a few months.

Despite the GDP declines, the labor market is booming, with employers adding roughly 400,000 jobs per month on average in the first three months of the year.

”The NBER won’t call a first-half recession,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note Friday. “The jobs data support our view that talk of the economy being in recession right now is fanciful.”

A chart by Deutsche Bank shows that median non-farm payrolls in the 12 months before and after the start of a recession were mostly below the 200,000 mark, whereas the last 12 months of non-farm payroll prints currently are significantly higher, with the lowest number at 368,000 in April.

Most experts would agree that while GDP is slowing, the economy is still in good enough shape to withstand rate hikes by the Fed.

That's the basis for expectations that the U.S. central bankers will continue aggressively.