Only eight days separated the two government reports, yet they seemed to describe totally different realities.
The first showed a weak economy which, coupled with the highest inflation in 40 years, offered consumers nothing but heartache. The second reflected a juggernaut that was creating jobs faster than workers could be found to fill them, with the unemployment rate matching the pre-pandemic low of 3.5%.
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“It is normal for different economic indicators to point in different directions. It’s the magnitude of the gaps right now that is unprecedented,” said Jason Furman, former economic adviser to President Barack Obama. “It’s not just that the economy is growing on one side and shrinking on the other. It grows incredibly strongly in one measure while shrinking at a pretty decent rate in another.
In Washington on Friday, President Biden took a victory lap for job growth while claiming credit for gasoline prices falling for more than 50 straight days. Yet he also acknowledged the disconnect between the sunny jobs report and the inflation headaches plaguing many households.
“I know people will hear today’s amazing jobs report and say they don’t see it, they don’t feel it in their own lives,” the president said, speaking from a balcony of the White House. “I know how difficult it is. I know it’s hard to rejoice in job creation when you already have a job and are dealing with rising prices, food and gas, and so much more. I understand.”
The surprisingly robust jobs number appears to challenge the president’s argument that the economy is “transitioning” from its faster growth rates last year to a slower, more sustainable pace.
No one expects the economy to continue creating half a million new jobs every month. No one thinks that could happen without inflation remaining at uncomfortable heights.
Nearly five months after the Federal Reserve began raising interest rates to calm the economy and bring down the highest inflation since the early 1980s, the labor market report showed that the the country’s central bank still had work to do. The average hourly wage of private sector workers has risen 5.2% over the past year, hinting at the kind of wage-price spiral the Fed is determined to prevent.
Last month, the Fed raised its benchmark interest rate to a range of 2.25% to 2.5%, its highest level in nearly four years. Yet, in “real” or inflation-adjusted terms, borrowing costs remain deeply negative, boosting economic growth.
Fed Chairman Jerome H. Powell said last month that further rate hikes are likely at the next meeting of policymakers 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 will have by then,” he told reporters.
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Investors see a 70% chance of a bigger move, according to CME Group, which tracks derivative purchases linked to the central bank’s key rate.
On Wednesday, the government is expected to release inflation figures for July, which are expected to show a slight improvement from 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 in itself a sign that the current environment is murkier than usual.
“A lot of what is happening in this economy is driven by the pandemic and then the pandemic response. And so, we are in a very unusual time, in many ways. [it’s] hard to read that data,” Loretta Mester, chairwoman of the Federal Reserve Bank of Cleveland and voting member of the Fed’s rate-setting committee, told The Washington Post this week.
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Nearly 22 million Americans lost their jobs between February and April 2020 during the first months of covid. The unemployment rate hit 14.7%, the highest figure recorded by the Labor Department in a streak that began in 1948.
With July’s gains, the economy has now recovered all the lost jobs.
But the workforce has been reshaped. Today there are more warehouse and logistics workers and fewer workers working for hotels and airlines.
Employers are reacting differently than 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 major layoffs, they are instead reducing hiring or carrying out targeted job cuts.
Weekly first-time jobless claims are up, but only to 260,000 from their 54-year low of 166,000 in March.
Consumers also acted differently, buying more goods than normal while stuck at home during the first wave of the pandemic. Retailers who ordered unusual volumes of furniture, electronics and clothing from foreign suppliers then misjudged the pace of consumers’ return to traditional shopping habits, leaving stores crammed with unwanted goods.
In addition to the lingering ills of the pandemic, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.
All of these forces have combined to produce unusual and sometimes contradictory economic data. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created during the month. Still, housing starts have fallen over the past two months and the latest manufacturing ISM was the weakest in two years.
“We are in a somewhat dizzying economic cycle. We get economic data that fluctuates quite quickly and it is very difficult to have an accurate reading of the economic situation at any given time,” Daco said.
Individual data points also provide snapshots of the economy that are out of sync, said Rand Corp economist Kathryn Edwards.
Friday’s Labor Department report counted jobs gained in July. The last reading of the consumer price index covered the month of June. And the gross domestic product reading that sparked the fury of the recession describes 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 of an economic downturn,” she said.
Labor market and production data told different stories about the economy throughout the year. After six straight months of contraction, the economy is about $125 billion smaller than it was at the end of 2021, according to Commerce Department inflation-adjusted data.
Yet employers hired 3.3 million new workers during the same period.
How could more workers produce 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, nonfarm business productivity in the first quarter fell 7.3%, the biggest drop since 1947, according to the Bureau of Labor Statistics. Preliminary second-quarter results will be released on Tuesday and are expected to show the largest two-quarter decline in history, he said.
These figures may exaggerate the change. During the pandemic, companies may have been able to maintain production with a covid-reduced workforce by urging or incentivizing remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by invoking emergency conditions.
“They worked very hard, but they wouldn’t work very hard forever,” Furman said.
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Similarly, the participation rate generally increases when employers add jobs and the unemployment rate decreases. But since March, it has fallen, according to the Bureau of Labor Statistics.
Some Americans have retired instead of risking work during the pandemic. Others – mostly women – who lacked adequate childcare, stayed home with young children or other vulnerable relatives.
An April article by economists at the Federal Reserve Bank of Richmond found that “the pandemic has permanently reduced participation in the economy.”
Participation of Americans in their early working years, ages 25 to 54, has almost fully recovered. But for those 55 and older, there has been almost no improvement since the initial plunge at the start of the pandemic. And for younger workers, aged 20 to 24, participation is lower now than at the end of last year.
“I don’t think we have a good idea of why other workers aren’t coming back,” said Kathy Bostjancic, chief U.S. economist for Oxford Economics. “It’s just such an unusual time.”
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