This week in Bidenomics: Everybody stop hiring!

There are upside-down moments in economics. We’re in the middle of one.

Employers added 263,000 new jobs in November, and pay rose 5.1% on a year-over-year basis. That’s good news. It’s also bad news.

First, the good news. Economists keep forecasting a slowdown, and some think a recession is coming. But you can’t really have a recession if businesses keep hiring and giving out raises. Strong employment and robust pay encourage people to keep spending, and consumer spending keeps the U.S. economy going strong. “This expansion just keeps rolling on,” University of Michigan economist Justin Wolfers tweeted on Dec. 2, following the reports release. “Remember all that recession talk? It was nonsense. Bollocks.”

The bad news is inflation. The monthly jobs report does not measure inflation directly. That’s another report. But wages affect inflation because when they rise, employers try to pass the higher costs onto consumers by raising prices. The Federal Reserve wants to see wage growth moving down, not up, because that would be evidence that inflation is moderating. But wage growth isn’t slowing, it’s accelerating. Wages ticked upward from October to November, and the Labor Dept. revised the October and September numbers upward, as well.

“The jobs report is encouraging for workers,” Harvard economist Jason Furman tweeted, “but discouraging for the Fed’s hopes that slowing wages will make its job easier. You probably want to revise your views on inflation and not in a favorable direction.”

The biggest issue in the economy is inflation, not employment. Inflation has been drifting down since peaking at 9.1% in June. It’s at 7.7% now. But the Fed wants to get it under 3%. To do that, the Fed has been hiking interest rates since March, pushing up the cost of borrowing.

That normally slows the economy because it makes money more expensive, and businesses and consumers borrow less. But the hot labor market means the economy isn’t slowing enough. Fed chair Jerome Powell can’t come out and say it, but he’d be delighted if businesses stopped hiring and wages dropped. That would be the slowdown that signals the Fed’s magic is working. Then, the Fed could stop raising rates.

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For now, the Fed needs to keep going. Furman thinks inflation will only fall to about 5% at the current pace of wage growth. So in theory the Fed will have to work harder and raise rates more to get inflation where it wants to be.

One key question is whether high wage growth is a temporary outcome of the COVID-related distortions of the last couple of years or a lasting phenomenon driven by deep structural changes. The data suggests wages have reset at new, higher levels, as the chart below shows. If you disregard the sharp up-and-down jags around the 2020 COVID outbreak, it seems pretty clear there’s been a post-pandemic step-up in wages.

If that lasts, it means interest rates will have to go quite a bit higher to get inflation down. The whole problem with that is it could slow the economy more than expected and cause a recession in its own right. Stocks sold off after the “good” jobs report because investors don’t like the negative implications: higher interest rates, reduced business profitability and a longer path back toward normalizing inflation.

Ordinary people may wonder why the Fed doesn’t just tolerate higher inflation if the labor market is strong and pay is going up. It’s a totally fair question. The folks at the Fed are smart, but so is Elizabeth Warren, the Democratic senator from Massachusetts who thinks the Fed is being too aggressive. Warren and others worry the Fed will go too far and cause a recession that will be more harmful to working people than the inflation the Fed is trying to slay.

President Biden is happy to talk about job growth and wage growth, and why not. The White House is correct when it says job creation during Biden’s presidency, so far, is the strongest in history. That’s a quirk of timing, since Biden came into office just as the strong post-COVID recovery was gaining steam. But it doesn’t render the factoid untrue.

The Fed and many economists are obsessed with what the economy will do in three or six months, since there’s a lag between Fed actions, such as raising rates, and the impact they have on the real economy. But ordinary people don’t need to think that way. Jobs are plentiful and pay is going in the right direction. That’s pretty good, for now.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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