By Doina Chiacu and Howard Schneider
WASHINGTON, Feb 9 (Reuters) – White House economic adviser Kevin Hassett said on Monday that U.S. job gains could be lower in the coming months due to slower labor force growth and higher productivity, weighing into a debate that is also underway at the Federal Reserve and promises to shape the central bank’s coming policy decisions.
Monthly payroll employment grew by an average 53,000 positions in November and December, compared to an average gain of 183,000 jobs per month in the 10 years prior to the COVID-19 pandemic, and far more than that during an employment boom in the later years of the Biden administration.
Some of that job growth, however, was driven by a rapid rise in the supply of workers due to loose immigration policy, something President Donald Trump has reversed, and which is now complicating economists’ efforts to understand whether the labor market is slowing because the economy is weakening, or because there aren’t enough employees to fill available jobs.
Hassett, the director of the White House’s National Economic Council, is offering a third explanation of productivity lifting the amount each worker can produce, and allowing the economy to grow even if the number of workers is constrained and monthly job gains are low.
The combination of strong GDP growth and a pretty big decline in the labor force “because of illegals (undocumented migrants) leaving the country” could lead to lower job numbers, Hassett said in an interview with CNBC. “So I think that you should expect slightly smaller job numbers that are consistent with high GDP growth right now … We shouldn’t panic if you see a sequence of numbers that are lower than you’re used to, because, again, population growth is going down and productivity growth is skyrocketing. It’s an unusual set of circumstances.”
The Labor Department is scheduled to report its delayed employment report for January on Wednesday. Nonfarm payrolls likely increased by 70,000 jobs last month, a Reuters survey of economists showed, after rising by 50,000 in December.
The U.S. unemployment rate was 4.4% in December. Economists polled by Reuters expect it will be unchanged for January.
FED OFFICIALS OPEN TO PRODUCTIVITY ARGUMENT
Hassett’s comments track those of Fed Chair Jerome Powell at a press conference two weeks ago following the central bank’s latest policy meeting, when he said U.S. policymakers faced a “very challenging and quite unusual situation” where the demand for and the supply of workers were both falling.
That situation is consistent with both slower-than-typical job growth and a steady unemployment rate.
It also makes it “a difficult time to read the labor market,” Powell said, because the Fed’s reaction could vary depending on whether supply or demand plays the larger role in limiting job growth.
If supply is constrained because potential workers have been deported, it could be felt in hiring bottlenecks and rising wages – a potential precursor to inflation and a reason for the Fed to be cautious about rate cuts.
If job growth is fading because of weak demand, it would be a reason for the Fed to cut interest rates to support economic growth and hiring. Trump has lambasted Powell and the central bank for failing to deliver the deep rate cuts the president feels are needed to stimulate the economy.
Like Hassett, Fed chief nominee Kevin Warsh, recently named by Trump to replace Powell in May and awaiting a Senate confirmation hearing, has also said higher productivity could temper inflation and change the central bank’s policy outlook.
Powell and the bulk of Fed policymakers say they are open to the possibility that recent strong productivity growth will persist, but are also reluctant to base short-term monetary policy decisions on a hypothetical.
“The demand versus supply question is important for monetary policy. If it’s demand, the Fed needs to intervene … If it’s supply, inflation will be stickier, and the Fed should hold firm,” said Dario Perkins, managing director of global macro at TS Lombard. “It’s important to remember, however, that there is already plenty of demand stimulus on the way. … With supply impaired, that could be problematic.”
(Reporting by Doina Chiacu and Howard Schneider; Editing by Paul Simao)
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