When it comes to economy, more is usually better.
Stronger job creation, faster wage growth and increased consumer spending are all, in normal times, signs of a healthy economy. Growth may not be enough to deliver widespread prosperity, but it is necessary, which makes any loss of momentum a worrying sign that the economy could falter or, worse, head into a recession.
But these are not normal times. With nearly twice as many jobs open as workers available and businesses struggling to meet record demand, many economists and policymakers say what the economy needs right now is not more. , but less – less hiring, less wage growth and most importantly less inflation, which is running at its fastest pace in four decades.
Jerome Powell, the chairman of the Federal Reserve, called the labor market “too hot”, and the central bank is raising interest rates in an attempt to calm it down. President Joe Biden, who met with Powell on Tuesday, wrote in an op-ed this week in the Wall Street Journal that a slowdown in job creation “will not be cause for concern” but rather would be “a sign that we are succeeding in moving on to the next phase of recovery.
“We want a full and sustainable recovery,” said Claudia Sahm, a former Fed economist who has studied the government’s economic policy response to the pandemic. “The reason we can’t circle victory right now on the recovery – the reason it’s incomplete – is because inflation is too high.”
But a cooling economy comes with its own risks. Despite inflation, the recovery from the pandemic recession has been among the strongest on record, with unemployment falling rapidly and incomes rebounding fastest for those at the bottom. If the recovery slows too much, it could undo much of that progress.
“That’s the needle we’re trying to thread right now,” said Georgetown University economist Harry Holzer. “We want to give up as little of the gains we’ve made as possible.”
Economists disagree on the best way to strike this balance. Powell, having played down inflation last year, now says getting it under control is his top priority – and argues the central bank can do so without halting the recovery. Some economists, especially on the right, want the Fed to be more aggressive, even if it means causing a recession. Others, especially on the left, argue that inflation, while a problem, is a lesser evil than unemployment and therefore the Fed should adopt a more cautious approach.
But where progressives and conservatives largely agree is that assessing the economy will be particularly difficult in the coming months. Distinguishing a healthy cooling from an ominous stall will require looking beyond the indicators that typically grab the headlines.
“It’s a very difficult time to interpret economic data and even to understand what’s going on with the economy,” said Michael Strain, an economist at the American Enterprise Institute. “We are entering a period where there will be tons of debate about whether we are in a recession right now.”
Slower job growth could be good (or bad).
The May jobs report, which the Department of Labor will release on Friday, will provide a case study in how difficult it is to interpret economic data right now.
Usually, a single number from the monthly report — the total number of jobs added or lost — is enough to signal the health of the labor market. Indeed, most of the time, the driver of the labor market is demand. If business is strong, employers will want more workers and job growth will accelerate. When demand lags, hiring slows, layoffs increase, and job growth stagnates.
Today, however, the limiting factor in the labor market is not demand but supply. Employers eager to hire: There were 11.4 million job openings at the end of April, near a record high. But there are about 500,000 fewer people working or actively seeking work than at the start of the pandemic, leaving employers scrambling to fill available jobs.
The labor force has grown significantly this year, and forecasters expect more workers to return as the pandemic and the disruption it has caused continues to recede. But the pandemic may also have led to more lasting changes in Americans’ work habits, and economists don’t know when or under what circumstances the labor force will make a full rebound. Even then, there may not be enough workers to meet the extraordinarily high level of employer demand.
Most forecasters expect Friday’s report to show job growth slowed in May. But this figure alone will not reveal whether the mismatch between supply and demand is easing. The slowdown in job growth coupled with an increase in the labor force could be a sign that the labor market is returning to equilibrium as demand cools and supply improves. But the same level of job growth without an increase in the supply of workers could indicate the opposite: that employers are having an even harder time finding the help they need.
Many economists say they will watch the labor force participation rate – the share of the population working or looking for work – as closely as the overall employment growth figures in the months coming.
“You can unambiguously encourage greater labor force participation,” said Jason Furman, a Harvard economist who served as an adviser to President Barack Obama. “Beyond that, nothing else is unambiguous.”
Wage growth may need to slow.
Another figure will hold a lot of attention from economists, policymakers and investors: wage growth.
Employers have responded to the fierce competition for workers exactly the way Econ 101 says they should: by raising wages. The average hourly wage rose 5.5% in April from a year earlier, more than double the rate at which it was increasing before the pandemic.
Normally, faster wage growth would be good news. Persistently weak wage increases have been a grim feature of the long, slow recovery from the last recession. But even some economists who lamented those slow gains at the time say the current rate of wage growth is unsustainable.
“It’s something we’re used to saying unequivocally, that’s fine, but in this case it just increases the risk that the economy will overheat again,” said Adam Ozimek, chief economist at the Economic Innovation Group, a Washington research organization. As long as wages rise 5% or 6% a year, he said, it will be virtually impossible to bring inflation back to the Fed’s 2% target.
Fed officials are watching closely for signs of a “wage-price spiral,” a self-perpetuating pattern in which workers expect inflation and therefore demand to rise, causing employers to raise wages. price to compensate. Once such a cycle has taken hold, it can be difficult to break it – a perspective Powell cited to explain why the central bank has become more aggressive in fighting inflation.
“It’s a risk we just can’t take,” he told a news conference last month. “We cannot allow a wage-price spiral to occur. And we cannot let inflation expectations become unanchored. It’s just something we can’t allow, and so we’ll look at it that way.
Some economists, particularly on the left, argue that there is little evidence that wage growth is fueling inflation, let alone that a wage-price spiral is developing. They argue that recent wage increases reflect a rare moment of worker power in the labor market and that the Fed would be wrong to stifle it.
But wages, on average, are not keeping up with inflation, which means many workers are losing ground despite the strength of the job market. For workers to thrive, their wages must rise after adjusting for inflation – which almost certainly requires lower inflation.
“What people are feeling is real,” said Darrick Hamilton, an economist at The New School in New York. “A pay rise that’s not as high as the milk price increase doesn’t make you any better.”
Hamilton argues that the Fed is right to try to rein in inflation, but must design its policies recognizing that it will be black workers, along with other disadvantaged groups, who will suffer the most if the recovery falters. “The question we should be asking is who bears the burden” of Fed policies, he said.
Keep an eye out for job postings.
Historically, even small increases in the unemployment rate have almost always signaled the onset of a recession. If this relationship holds in the current environment, it suggests that if policymakers want to control inflation without causing a slowdown, they will need to find a way to cool the labor market without causing a large number of layoffs.
Powell and other officials argue it is possible, in part because so many jobs are available right now. In a speech in Germany this week, Christopher Waller, a Fed governor, argued that as demand slows, employers are likely to start posting fewer jobs before turning to layoffs. This could lead to slower wage growth – because with fewer employers trying to hire, there will be less competition for workers – without a sharp rise in unemployment.
“I think there’s room right now for inflation to come down significantly without unemployment going up,” said Mike Konczal, an economist at the Roosevelt Institute.
The Fed’s efforts to calm the economy are already paying off, Konczal said. Mortgage rates have risen sharply and there are signs that the housing market is slowing as a result. The stock market has lost nearly 15% of its value since the start of the year. This loss of wealth will likely lead at least some consumers to cut spending, leading to lower hiring. Job postings fell in April, although they remained high, and wage growth moderated.
“There’s a lot of evidence to suggest the economy has already slowed down,” Konczal said. He said he was optimistic that the United States was on a path of “normalization to a steady good economy” instead of the boom it has been experiencing over the past year.
But the problem with such a “soft landing,” as Fed officials call it, is that it is still a landing. Wage growth will be slower. Job opportunities will be fewer. Workers will have less leverage to demand flexible hours or other benefits. For the Fed to achieve this outcome without causing a recession would be a victory – but it might not be for workers.
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