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Friday’s Blowout Jobs report may have silenced claims that the US is in a recession, but it hasn’t solved the mystery of the state of the economy or answered questions about where the journey is headed.
Government data showing the economy had contracted for a second straight quarter — which is an informal definition of a recession — was fresh as the Labor Department said on Friday employers added 528,000 jobs in July. That was more than twice as many as economists had expected.
Only eight days elapsed between the two government reports, and yet they seemed to describe completely different realities.
The first showed a weak economy which – coupled with the highest inflation in 40 years – caused nothing but grief for consumers. The second reflected a juggernaut that was creating jobs faster than workers could be found to fill them, with an unemployment rate hovering at its pre-pandemic low of 3.5 percent.
The factors driving inflation higher each month
“It is normal for different economic indicators to point in different directions. The current magnitude of the discrepancies is unprecedented,” said Jason Furman, former top economic adviser to President Barack Obama. “It’s not just about the economy growing on the one hand and shrinking on the other. It grows incredibly fast in one bar while shrinking to a pretty decent clip in another.
President Biden rode a victory lap for job growth in Washington on Friday while claiming credit for gas prices falling for more than 50 straight days. However, he also acknowledged the discrepancy between the sunny jobs report and the inflationary headaches plaguing many households.
“I know people are going to 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 from a White House balcony. “I know how difficult it is. I know it’s difficult to feel comfortable creating jobs when you already have a job and dealing with rising prices, food and gas and so much more. I get it.”
The surprisingly resilient jobs number appeared to challenge the President’s argument that the economy is making a “transition” from its faster growth rates over the past year to a slower, more sustained pace.
Nobody expects the economy to keep adding half a million new jobs every month. Nobody believes that this would be possible without inflation remaining at uncomfortable levels.
Nearly five months after the Federal Reserve began raising interest rates to cool the economy and bring down the highest inflation since the early 1980s, the jobs report showed the country’s central bank still has work to do. Average hourly wages for workers in the private sector rose 5.2 percent last year, pointing to the kind of wage-price spiral the Fed is determined to prevent.
Last month, the Fed raised interest rates to a range of 2.25 to 2.5 percent, the highest level in almost four years. However, in “real” or inflation-adjusted terms, the cost of borrowing remains sharply negative, acting as a spur to economic growth.
Fed Chair Jerome H. Powell said last month that more rate hikes are likely when policymakers next meet on September 21. The size of the next increase — either half a percentage point or three-quarters of a point — will “depend on the data we’re coming back and forth in between,” he told reporters.
A rising dollar could help the Fed fight inflation
Investors see a 70 percent chance of the larger move, according to CME Group, which tracks purchases of derivatives linked to the central bank’s benchmark interest rate.
On Wednesday, the government will release inflation figures for July, which are expected to show a slight improvement from June’s 9.1 percent, thanks to falling energy prices.
Powell’s decision to end the Fed’s telegraphic actions by providing “forward guidance” on its plans is itself a sign that the current environment is grimmer than usual.
“A lot of what’s happening in this economy is being driven by the pandemic and then the response to the pandemic. And so we are in a very unusual time in many ways [it’s] Difficult to read through this data in any way,” 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.
The Fed’s rate hikes could mark the beginning of a difficult new economic climate
Almost 22 million Americans lost their jobs between February and April 2020 in the first few months of Covid. The unemployment rate reached 14.7 percent, the highest in a series recorded by the Labor Department that began in 1948.
With July’s gains, the economy has now regained all of the lost jobs.
But the workforce has been transformed. There are now more warehouse and logistics workers and fewer employees working for hotels and airlines.
According to Gregory Daco, chief economist at EY-Parthenon, employers are reacting differently to signs the economy may be slowing than they were before the pandemic. Instead of immediately resorting to significant layoffs, they instead reduce hiring or implement targeted job cuts.
Weekly initial jobless claims are up, but only to 260k from a 54-year low of 166k in March.
Consumers also behaved differently, buying more goods than normal while trapped at home during the first wave of the pandemic. Retailers who ordered unusual quantities of furniture, electronics and clothing from foreign suppliers later misjudged the pace of consumers’ return to traditional buying patterns, leaving stores full of unwanted goods.
Adding to the ongoing ills of the pandemic, the war in Ukraine has disrupted global commodity markets and contributed to higher inflation.
All of these forces combine 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 this month. Still, housing starts have declined over the past two months and the latest ISM manufacturing gauge was the weakest in two years.
“We’re in a pretty dizzying economic cycle. We get economic data that fluctuates pretty quickly and it’s very difficult to know exactly where the economy is at any given 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 Rand Corp.
Friday’s Labor Department report enumerated jobs gained in July. The last reading of the consumer price index was in June. And the gross domestic product reading that sparked the recession furore described the activity that took place between April and June — and is revised twice.
“It’s challenging for an economist, but also for a reader who wants to understand how vulnerable they are to an economic downturn,” she said.
Labor market and manufacturing data have told mixed stories about the economy throughout the year. After six consecutive months of contraction, the economy is about $125 billion smaller than it was at the end of 2021, according to inflation-adjusted data from the Commerce Department.
Still, employers hired 3.3 million new workers over the same period.
How could more workers produce fewer goods and services?
One explanation is that workers are less productive today than they were during the pandemic’s emergency phase, when companies struggled to produce their required orders with fewer workers, Furman said.
Nonfarm productivity actually fell 7.3 percent in the first quarter, the biggest drop since 1947, according to the Bureau of Labor Statistics. Preliminary results for the second quarter will be released on Tuesday and are expected to show the biggest two-quarter decline in the show history, he said.
These numbers may exaggerate the change. During the pandemic, companies may have been able to sustain production with a workforce thinned by Covid-19 by admonishing or encouraging remaining workers to work harder or longer. But there’s a limit to how long bosses can motivate people by citing emergencies.
“They worked extra hard, but they wouldn’t work that hard forever,” Furman said.
The World Bank is warning that the global economy could suffer 1970s-style “stagflation”.
Likewise, as employers add jobs and the unemployment rate falls, the activity rate typically increases. But it has been falling since March, according to the Bureau of Labor Statistics.
Some Americans retired rather than risk working during the pandemic. Others – mostly women – who lacked adequate childcare stayed at 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.”
The labor market participation rate of Americans in their prime, ages 25 to 54, has almost completely recovered. But for the over-55s, there has been almost no improvement since the initial dip at the start of the pandemic. And for younger workers aged 20 to 24, participation is now lower than it was late last year.
“I don’t think we have a handle on why other workers aren’t coming back,” said Kathy Bostjancic, US chief economist at Oxford Economics. “It’s just such an unusual time.”