WASHINGTON, Feb 9 (Reuters) – White House economic adviser Kevin Hassett said on Monday that U.S. job growth could be lower in the coming months due to slower labor force growth and higher productivity, contributing to a debate that is also underway at the Federal Reserve and promises to shape the central bank’s next policy decisions.
The number of formal jobs grew by an average of 53,000 jobs in November and December, compared with an average gain of 183,000 jobs per month in the 10 years before the Covid-19 pandemic, and much more than that during a jobs boom in the last years of the Biden administration.
Some of that job growth, however, was driven by a rapid increase in the supply of workers due to relaxed immigration policy, something that President Donald Trump reversed and that is now complicating economists’ efforts to understand whether the job market is slowing because the economy is weakening or because there are not enough workers to fill available jobs.
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Hassett, director of the White House National Economic Council, offers a third explanation: Productivity increases the amount each worker can produce, allowing the economy to grow even if the number of workers is limited and monthly job gains are low.
The combination of strong GDP growth and a fairly large decline in the labor force “due to illegals (undocumented migrants) leaving the country” could lead to lower employment numbers, Hassett said in an interview with CNBC.
So I think you should expect slightly lower employment numbers, consistent with the high GDP growth right now… We shouldn’t panic if you see a string of lower numbers than you’re used to, because, again, population growth is slowing and productivity growth is soaring. It’s an unusual set of circumstances.”
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The Labor Department is expected to release its delayed employment report for January on Wednesday. Nonfarms likely rose by 70,000 last month, a Reuters poll of economists showed, following a rise of 50,000 in December.
The US unemployment rate was 4.4% in December. Economists polled by Reuters expect it to remain unchanged in January.
FED AUTHORITIES ARE OPEN TO THE PRODUCTIVITY ARGUMENT
Hassett’s comments follow those of Fed Chair Jerome Powell at a news conference two weeks ago following the central bank’s last monetary policy meeting, when he said U.S. policymakers faced a “very challenging and very unusual situation” in which demand for and supply of workers was falling.
This situation is consistent with slower than normal job growth and a stable unemployment rate.
This also makes it “difficult to interpret the job market,” Powell said, because the Fed’s reaction can vary depending on whether supply or demand plays a larger role in limiting job growth.
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If supply is constrained because potential workers have been deported, this 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 slowing due to weak demand, that would be a reason for the Fed to lower interest rates to support economic growth and hiring. Trump has criticized Powell and the central bank for failing to make the deep rate cuts the president considers necessary to stimulate the economy.
Like Hassett, Fed chair candidate Kevin Warsh, recently nominated by Trump to replace Powell in May and awaiting a Senate confirmation hearing, also said that higher productivity could moderate inflation and change the outlook for central bank policy.
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Powell and most Fed policymakers say they are open to the possibility that recent strong productivity growth persists, but they are also reluctant to base short-term monetary policy decisions on a hypothesis.
“The issue of demand versus supply is important for monetary policy. If it’s demand, the Fed needs to intervene… If it’s supply, inflation will be more persistent and the Fed must hold its ground,” said Dario Perkins, managing director of global macroeconomics at TS Lombard. “It’s important to remember, however, that there is already a lot of demand stimulus on the way. … With supply hit, this could be problematic.”
