When it comes to economics, more is usually better.
Higher job gains, faster wage growth and higher consumer spending are all signs of a healthy economy in normal times. Growth may not be enough to ensure widespread prosperity, but it is necessary – turning any loss of momentum into a worrying sign that the economy may be losing steam or, worse, heading for a recession.
But these are not normal times. With almost twice as many job openings as workers and companies struggling to meet record demand, many economists and politicians say what the economy needs right now is no more, less -lower hiring, less wage growth and, above all, less inflation, which is going at its fastest pace in four decades.
Jerome H. Powell, chairman of the Federal Reserve, called the labor market “unsustainably hot,” and the central bank is raising interest rates to try to cool it. President Biden, who met with Mr Powell on Tuesday, wrote in an opinion article this week in The Wall Street Journal that delaying job creation “will not be a cause for concern” but rather ” a sign that we are successfully moving to the next phase of recovery. “
“We want a full and sustainable recovery,” said Claudia Sam, a former Fed economist who studied the government’s response to the pandemic’s economic policies. “The reason we can’t take the winning lap right now in recovery – the reason it’s incomplete – is that inflation is too high.
But the cooling economy carries its own risks. Despite inflation, the recovery from the pandemic recession is among the strongest in history, with unemployment falling rapidly and incomes recovering the fastest for those at the bottom. If recovery slows down too much, it could undo much of that progress.
“This is the needle we are trying to put in right now,” said Harry J. Holzer, an economist at Georgetown University. “We want to give up as little profit as possible that we have made.”
Economists disagree on the best way to strike this balance. Mr Powell, after cutting inflation last year, now says tackling it is his top priority – and says the central bank can do it without interrupting the recovery. Some economists, especially on the right, want the Fed to be more aggressive, even at the risk of causing a recession. Others, especially on the left, argue that inflation, while a problem, is less evil than unemployment, and that the Fed should therefore take a more cautious approach.
But where progressives and conservatives largely agree, the assessment of the economy will be particularly difficult in the next few months. Distinguishing healthy cooling from anxious stagnation will require looking beyond the indicators that usually make headlines.
“It’s very difficult to interpret economic data and even understand what’s going on with the economy,” said Michael R. Strain, an economist at the American Enterprise Institute. “We are entering a period where there will be a lot of debate about whether we are currently in recession.
Slower job growth can be good (or bad).
The May Jobs Report, to be released by the Ministry of Labor on Friday, will provide a case in point for the difficulty of interpreting current economic data.
Understand inflation and how it affects you
Usually one number from the monthly report – total added or lost jobs – is enough to signal health in the labor market. This is because most of the time the driving force in the labor market is demand. If business is strong, employers will want more workers and job growth will accelerate. When demand lags behind, then hiring slows, layoffs increase and job growth stops.
Currently, however, the limiting factor in the labor market is not supply but supply. Employers are eager to hire: at the end of April, there were 11.4 million vacancies, close to the record. But there are approximately half a million fewer people working or actively looking for work than when the pandemic began, leaving employers struggling to take up available jobs.
The workforce has grown significantly this year and forecasters expect more workers to return as the pandemic and the disruptions it causes continue to recede. But the pandemic may also have led to more lasting changes in Americans’ work habits, and economists aren’t sure when or under what circumstances the workforce will fully recover. Even then, there may not be enough workers to meet the extremely high level of demand from the employer.
Most forecasters expect Friday’s report to show that job growth slowed in May. But this number alone will not reveal whether the mismatch between supply and demand is diminishing. The slowdown in job growth, combined with a growing workforce, may be a sign that the labor market is returning to balance as demand cools and supply improves. But the same level of job growth without an increase in the supply of workers may show the opposite: that employers have an even harder time finding the help they need.
Many economists say they will monitor the level of labor force participation – the share of the population working or looking for work – just as closely as the headline growth in jobs in the coming months.
“One can unequivocally support greater labor force participation,” said Jason Furman, a Harvard economist who advised President Barack Obama. “Besides, nothing else is unequivocal.”
Wage growth may need to be delayed.
Another issue will attract a lot of attention from economists, politicians and investors: wage growth.
Employers have responded to the fierce competition for workers exactly as Econ 101 says they should by raising wages. Average hourly incomes rose 5.5 percent in April from a year earlier, more than twice the rate they had risen before the pandemic.
Usually, faster wage growth would be good news. The persistently small increase in wages was a grim sign of the long slow recovery that followed the recent recession. But even some economists, who complained about the slow gains at the time, say the current rate of wage growth is unsustainable.
“This is something we are used to saying quite unequivocally that it is good, but in this case it simply increases the risk of further overheating of the economy,” said Adam Ozimek, chief economist at the Economic Innovation Group, a research organization in Washington. As wages rise by 5 percent or 6 percent a year, he said, it will be almost impossible to reduce inflation to the Fed’s 2 percent target.
Frequently asked questions about inflation
Map 1 of 5
What is inflation? Inflation is a loss of purchasing power over time, which means that your dollar will not go as far tomorrow as it does today. It is usually expressed as an annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
What causes inflation? This may be a result of growing consumer demand. But inflation can also rise and fall on the basis of developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? Depends on the circumstances. Rapid price increases lead to problems, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation usually creates problems for stocks. Financial assets generally performed poorly during the inflation boom, while tangible assets such as houses maintained their value better.
Fed officials are watching closely for signs of a “wage and price spiral,” a self-reinforcing model in which workers expect inflation and therefore increased demand, which causes employers to raise prices to compensate. Once such a cycle continues, it can be difficult to break, a perspective Mr Powell cites, explaining why the central bank has become more aggressive in fighting inflation.
“It’s a risk that we just can’t escape,” he told a news conference last month. “We cannot allow a spiral of wages and prices. And we cannot allow inflation expectations to remain unsettled. This is something we cannot allow to happen, so we will look at it this way. “
Some economists, especially on the left, say there is little evidence that wage growth fuels inflation, let alone a spiral in wages and prices. They argue that recent wage increases reflect a rare moment in the strength of workers in the labor market and that the Fed will be wrong to suppress it.
But wages, on average, are not keeping pace with inflation, which means that many workers are losing ground despite a strong labor market. In order for workers to prosper, their wages must rise after adjusting for inflation – which almost certainly requires inflation to fall.
“What people feel is real,” said Darik Hamilton, an economist at New School in New York. “An increase in wages that is not as high as an increase in the price of milk does not make you better.
Mr Hamilton said the Fed was right to try to curb inflation, but that it needed to formulate its policies by acknowledging that black workers, along with other disadvantaged groups, would suffer the most if the recovery failed. “The question we need to ask is who bears the weight” of Fed policies, he said.
Keep track of vacancies.
Historically, even small increases in unemployment have almost always signaled the onset of a recession. If this connection is maintained in the current environment, it implies that if politicians want to curb inflation without causing a downturn, they will have to find a way to cool the labor market without causing a large number of redundancies.
Mr Powell and other officials say this is possible, in part because there are so many jobs at the moment. In a speech in Germany this week, Christopher J. Waller, the Fed’s manager, says that as demand slows, employers …
Add Comment