Inflation “will always be a risk,” says ADP’s chief economist.

Inflation “will always be a risk,” says ADP’s chief economist.

  • ADP’s monthly report on Wednesday showed private payrolls rose by just 89,000 in September, well below the Dow Jones estimate of 160,000 and down from an upwardly revised 180,000 in August.
  • Although jobs reports have traditionally been viewed as a lagging indicator, Richardson noted that the relationship between the labor market and monetary policy has been repaired during the current session.
Help wanted at a storefront in Ocean City, New Jersey, U.S., Friday, August 18, 2023. Polls show that despite slowing inflation and job gains, Americans remain deeply skeptical of the president’s handling of the post-pandemic economy. Photographer: Al Drago/Bloomberg via Getty Images

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Inflation “will always be a risk” in the United States due to structural changes in the labor market, according to Neela Richardson, chief economist at payroll processing firm ADP.

Last year, with inflation spiraling out of control in major economies in the wake of the COVID-19 pandemic, the US Federal Reserve initiated a series of interest rate hikes that would take the target range for the federal funds rate from 0.25 to 0.5% in March 2022. To a 22-year high of 5.25-5.5% in July 2023.

Before that, interest rates had remained low for a decade as central banks around the world looked to stimulate their economies in the wake of the global financial crisis.

Speaking on CNBC’s “Squawk Box Europe” on Friday, Richardson said the past 10 years of US economic growth was driven by low interest rates as policymakers focused on undoing recession in the absence of inflationary pressures.

“This was an economy built on very close to zero interest rates for 10 years of economic expansion, and that was good because inflation was very low,” she said.

“But now inflation has woken up, and if you look at the demographic trends, the labor shortage is not going away. It is getting better but this is a structural change in the labor market due to the aging of the US population, so what that means is that inflation will always be a risk, it will support, and so A return to zero interest rates or near their lowest levels would be difficult to support the economy.

Richardson added that “the training wheels have come off” for the US economy and that businesses and consumers now have to “ride a regular bike.”

Despite recession fears due to the Federal Reserve’s unusual approach to tightening monetary policy, the US economy has remained surprisingly strong. The interest-rate-setting Federal Open Market Committee paused its rate-hiking cycle in September and sharply increased its forecasts for economic growth, now forecasting 2.1% growth in gross domestic product this year.

Meanwhile, inflation is back toward the Fed’s 2% target, and a tight labor market that some economists fear is increasing inflationary pressures has shown signs of easing, although unemployment remains relatively low by historical comparisons.

ADP’s monthly report on Wednesday showed private payrolls rose by just 89,000 in September, well below the Dow Jones estimate of 160,000 and down from an upwardly revised 180,000 in August.

This provided a contradictory signal to a Labor Department report earlier in the week in which job openings recorded a surprise jump in August, rising to their highest level since the spring and reversing a recent trend of decline.

Next, markets and Fed policymakers turned their attention to Friday’s non-farm payrolls report looking for further indications about the health of the US labor market.

Nonfarm payrolls rose by 336,000 during the month, far exceeding the Dow Jones estimate of 170,000 additional jobs. The unemployment rate was 3.8%, slightly higher than the expected estimate of 3.7%.

Richard Flynn, UK managing director of Charles Schwab, said investors would interpret the jobs report as a sign of a “healthy level of demand in the labor market.”

“Job growth has been a key driver of economic resilience recently, offsetting weaknesses in areas like housing and consumer goods,” he said in an email on Friday.

“Today’s strong numbers should help banish recession fears and inspire optimism about sectors of the economy that are likely to be stabilizing.”

Although jobs reports have traditionally been viewed as a lagging indicator, ADP’s Richardson noted that the relationship between the labor market and monetary policy has been fixed during the current session.

“I think there’s an underappreciated feedback loop. People say the labor market or the good jobs picture is lagging, but the jobs picture is actually feeding into current Fed policy, so it’s not just going in one direction, there’s a feedback loop,” she explained. “The link between them can amplify these effects.”

“It is no longer a simple relationship. We are in a complex period of the global economy, not just the United States, and the actions the Fed is taking are affecting the labor market but vice versa. So we can’t just say ‘Oh this is lagging, six to nine months from Fed policy will show up in the labor market – the labor market is driving Fed policy now.

    (tags for translation) Inflation 

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