Pick your economy: booming labor market or fizzling growth

The Washington Post · David J. Lynch

15:32 JST, August 7, 2022

WASHINGTON – Friday’s blowout jobs report may have quieted claims that the U.S. is in a recession, but it did not end the mystery about the state of the economy or resolve questions about where it is headed.

Government data showing the economy had contracted for the second consecutive quarter – meeting one informal definition of recession – was still fresh, as the Labor Department on Friday said employers had added 528,000 jobs in July. That was more than twice as many as economists expected.

Only eight days separated the two government reports, yet they seemed to describe entirely different realities.

The first showed a weak economy that – coupled with the highest inflation in 40 years – offered consumers nothing but grief. The second reflected a juggernaut that was minting jobs faster than workers could be found to fill them, with an unemployment rate that matched the pre-pandemic low of 3.5%.

“It’s normal for different economic indicators to point in different directions. It’s the magnitude of the discrepancies right now that’s unprecedented,” said Jason Furman, formerly President Barack Obama’s top economic adviser. “It isn’t just that the economy is growing in one measure and shrinking in another. It’s growing incredibly strongly in one measure while shrinking at a pretty decent clip in another.”

In Washington on Friday, President Joe Biden took a victory lap for the job growth while claiming credit for gas prices having declined for more than 50 consecutive days. Yet he also acknowledged the disconnect between the sunny employment report and the inflation headaches that afflict many households.

“I know people will hear today’s extraordinary jobs report and say they don’t see it, they don’t feel it in their own lives,” the president said, speaking from a White House balcony. “I know how hard it is. I know it’s hard to feel good about job creation when you already have a job and you’re dealing with rising prices, food and gas, and so much more. I get it.”

The surprisingly robust jobs number seemed to call into question the president’s argument that the economy is undergoing a “transition” from its faster growth rates last year to a slower, more sustainable pace.

No one expects the economy to continue producing half a million new jobs each month. No one thinks it could without inflation remaining at uncomfortable heights.

Almost five months after the Federal Reserve began raising interest rates to cool off the economy and to bring down the highest inflation since the early 1980s, the labor market report showed that the nation’s central bank has more work to do. Average hourly earnings for private sector workers rose by 5.2% over the past year, which hints at the sort of wage-price spiral that the Fed is determined to prevent.

Last month, the Fed lifted its benchmark interest rate to a range of 2.25% to 2.5%, its highest level in almost four years. Yet in “real” or inflation-adjusted terms, borrowing costs remain deeply negative, which acts as a spur to economic growth.

Fed Chair Jerome Powell said last month that additional rate increases are likely when policymakers next meet on Sept. 21. The size of the next increase – either half a percentage point or three-quarters of a point – will “depend on the data we get between now and then,” he told reporters.

Investors see a 70% chance of the larger move, according to CME Group, which tracks purchases of derivatives linked to the central bank’s key rate.

On Wednesday, the government is scheduled to release inflation readings for July, which are expected to show a modest improvement compared to June’s 9.1% figure, thanks to falling energy prices.

Powell’s decision to stop telegraphing Fed moves by providing “forward guidance” of its plans is itself a sign that the current environment is murkier than usual.

“A lot of what’s happening in this economy is being driven by the pandemic, and then the pandemic response. And so, we are in a very unusual time, in many ways [it’s] challenging to sort of read through those data,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, and a voting member of the Fed’s rate-setting committee, told The Washington Post this week.

Almost 22 million Americans lost their jobs between February and April of 2020 in covid’s first months. The unemployment rate hit 14.7%, the highest figure recorded by the Labor Department in a series that began in 1948.

With July’s gains, the economy now has recovered all of the lost jobs.

But the workforce has been reshaped. There are more warehouse and logistics workers today and fewer employees working for hotels and airlines.

Employers are reacting differently than they did before the pandemic to indications that the economy may be slowing, according to Gregory Daco, chief economist for EY-Parthenon. Rather than immediately resorting to significant layoffs, they are instead scaling back hiring or engaging in targeted job cuts.

Weekly first-time unemployment claims are up, but only to 260,000 from their 54-year low of 166,000 in March.

Consumers have also acted differently, buying more goods than normal while trapped at home during the pandemic’s initial wave. Retailers that ordered unusual volumes of furniture, electronics and apparel from overseas suppliers later misjudged the pace of consumers’ return to traditional buying patterns, leaving stores stuffed with unwanted goods.

On top of the pandemic’s lingering ills, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.

All of these forces combined to produce economic data that is unusual and sometimes contradictory. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. Yet housing starts have fallen for the past two months and the latest ISM manufacturing reading was the weakest in two years.

“We are in somewhat of a dizzying business cycle. We’re getting economic data that is fluctuating quite rapidly and it’s very hard to get a precise read on where the economy is at any point in time,” Daco said.

Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at the Rand Corp.

Friday’s Labor Department report tallied up jobs gained in July. The last consumer price index reading covered June. And the gross domestic product reading that started the recession furor described activity that occurred between April and June – and will be revised twice.

“It’s a challenge for an economist, but also for a reader who wants to understand how at risk they are for an economic downturn,” she said.

Labor market and output data have been telling different stories about the economy all year. After six straight months of shrinkage, the economy is roughly $125 billion smaller than it was at the end of 2021, according to inflation-adjusted Commerce Department data.

Yet employers have hired 3.3 million new workers over that same period.

How could more workers be producing fewer goods and services?

One explanation is that workers are less productive today than during the emergency phase of the pandemic, when companies struggled to keep producing their required orders with fewer workers, Furman said.

Indeed, non-farm business productivity in the first quarter fell 7.3%, the largest decline since 1947, according to the Bureau of Labor Statistics. Preliminary results for the second quarter will be made public on Tuesday and are likely to show the largest two-quarter drop in history, he said.

Those figures may overstate the change. During the pandemic, companies may have been able to maintain output with a covid-thinned workforce by exhorting or incentivizing the remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by citing emergency conditions.

“They worked extra hard, but they wouldn’t work extra hard forever,” Furman said.

Likewise, the labor force participation rate usually rises when employers are adding jobs and the unemployment rate is falling. But since March, it has fallen, according to the Bureau of Labor Statistics.

Some Americans retired instead of risking working during the pandemic. Others – mostly women – who lacked adequate child care, stayed home with young children or other vulnerable relatives.

An April paper by economists at the Federal Reserve Bank of Richmond found that “the pandemic has permanently reduced participation in the economy.”

Participation by Americans in their prime working years, ages 25 to 54, has almost entirely recovered. But for those 55 and older, there has been almost no improvement since the initial plunge at the outset of the pandemic. And for younger workers, age 20 to 24, participation is lower now than at the end of last year.

“I don’t think we have a great handle on why other workers are not coming back,” said Kathy Bostjancic, chief U.S. economist for Oxford Economics. “It’s just such an unusual period.”