FX168 Financial News Agency (North America) reported that Kevin Hassett, Director of the White House National Economic Council (NEC), stated on Monday (February 9) that the number of new jobs added in the U.S. may decline in the coming months due to factors such as a slowdown in labor force growth and an increase in productivity. This assessment echoes the ongoing discussion within the Federal Reserve regarding changes in labor supply and demand and could have significant implications for future monetary policy paths.
Data shows that average monthly new nonfarm payroll employment in the U.S. was approximately 53,000 in November and December, significantly lower than the pre-pandemic ten-year average of about 183,000 per month and far below the rapid job expansion phase during the later part of the Biden administration.
However, Hassett emphasized that the recent slowdown in employment does not necessarily indicate economic weakness. First, some of the past employment growth came from a rapid expansion in labor supply; after President Trump took office, tightened immigration policies made changes in labor supply more complex, increasing the difficulty for economists to determine whether the cooling of the labor market is due to weakening demand or supply contraction.
Second, Hassett proposed a third explanation: rising productivity is enhancing the output capacity of individual workers, allowing the economy to maintain growth despite limited labor force and low monthly new employment. In an interview, he noted that strong GDP growth coexisting with a shrinking labor force (which he attributed to undocumented immigrants leaving) might lead to future employment data appearing lower. He also pointed out that “population growth is declining, and productivity growth is surging,” and under this unusual combination, the market should not panic solely because of a string of lower-than-usual employment figures.
According to the schedule, the U.S. Department of Labor will release the delayed January employment report on Wednesday. Market surveys expect January nonfarm payrolls to increase by approximately 70,000, compared to 50,000 in December; regarding the unemployment rate, it was 4.4% in December, with January expected to remain roughly stable.
Federal Reserve officials are open to the ‘productivity explanation.’
Hassett’s remarks echoed those of Federal Reserve Chair Powell two weeks ago during the press conference following the latest monetary policy meeting. Powell noted at the time that U.S. policymakers are facing a ‘very challenging and rather unusual situation’ – where both labor demand and supply may simultaneously decline.
Powell indicated that this situation could correspond to new job additions being below normal while the unemployment rate remains relatively stable.
He also admitted that under these circumstances, ‘this is a very difficult period to interpret the labor market,’ as the Fed’s policy response will depend on whether the main factor restricting job growth originates from the demand side or the supply side.
If supply is constrained (for instance, due to reduced potential labor force from deportations), the labor market may experience recruitment bottlenecks and upward wage pressure – often a precursor to inflationary pressures, which would make the Fed more cautious about interest rate cuts.
If the weakening of job growth is due to sluggish demand, it indicates the need to support economic growth and hiring through interest rate cuts. Trump has consistently criticized Powell and the Federal Reserve for not implementing what he deems as ‘deep rate cuts necessary to stimulate the economy.’
Similar to Hassett, Kevin Warsh, who was nominated by Trump and is set to replace Powell as the Federal Reserve Chair in May pending Senate confirmation hearings, also stated that higher productivity might suppress inflation and alter the central bank’s policy outlook.
Powell and most Federal Reserve policymakers have expressed openness to the possibility that recent strong productivity growth could continue. However, they are reluctant to base short-term monetary policy decisions on what remains a ‘hypothetical’ assessment.
Dario Perkins, Managing Director of Global Macro at TS Lombard, pointed out: ‘The debate over demand versus supply is critical for monetary policy. If it is a demand issue, the Federal Reserve needs to intervene… If it is a supply issue, inflation will be stickier, and the Fed should maintain its stance.’ He also cautioned that there is already sufficient demand stimulus in place for the foreseeable future, and if the supply side is impaired, it could lead to more challenging consequences.