Let’s start with the April jobs numbers and then later explain why we think the Fed is misusing those data to conduct its current monetary policy.
First, we saw another strong payroll increase last month, with employers adding 428,000 additional workers. These hires are now averaging almost 519,000 per month since the start of the year, and this despite the fact that labor productivity itself has collapsed during this first quarter, which is largest since 1947.
Ironically, despite this poor productivity, average hourly earnings still managed to rise 5.5% last month, the second largest annual increase in 14 months. The fact that earnings have held up well is interesting, especially since average weekly hours worked have been trending lower since the start of 2021.
Overall, the establishment survey shows that labor market conditions continue to improve, with manufacturing employment adding 55,000, and leisure and hospitality posting another 78,000 jobs last month.
We had hoped to find at least some consistency in the household survey, but we didn’t quite get it. Here, the total number of employed people in the United States actually fell by 353,000 last month, of which 363,000 dropped out of the labor force altogether. Because of these two figures, the unemployment rate remained at 3.6%.
So what is it about the jobs numbers that is raising further concerns about the current course of Fed monetary tightening?
First, the Fed seems to be inclined to choose data points that essentially highlight the strength of the labor market to justify accelerating the pace of monetary tightening. Whether this is a valid review or not is debatable. But as an economist, I have to say that it always seems bizarre to hear Fed Chairman Powell – or any other government official – claim that the labor market is too strong. Or, as Powell put it, today’s labor market is “too hot” or even “unsustainably hot.”
It seems terribly strange. Policy makers generally strive to create an environment that maximizes employment. With more people working, the less the government spends on unemployment benefits, the broader the tax base, and plenty of research shows that low unemployment also reduces crime. It’s a win-win situation.
Yet the Fed now views the exceptionally strong labor market as a major source of inflation – and therefore needs to be tamed by higher interest rates.
But the villain here is not the strength of hiring in the United States. On the contrary, we see robust employment growth as a way to help increase the production of goods and services – and therefore to calm inflationary pressures.
Listen, we understand the Fed’s reasoning. Companies are in fierce competition to fill some 11.5 million vacancies while less than 6 million people are unemployed and actively looking for work. Fed economists worry that efforts to attract this limited pool of unemployed workers and retain those who exist will continue to drive up wages, which then forces employers to pass on higher labor costs to consumers. The subsequent rise in the cost of living would force employees to demand even more wage increases and, in doing so, trigger what the Fed fears most: a destructive wage and price spiral.
So it depends on how you perceive the bad guy in this inflation story. Should the economy be slowed down and pressures on prices reduced by suppressing job creation? We do not think so. Technology, robotics, artificial intelligence and cybersecurity have helped create millions of new jobs to help the economy run much more efficiently.
The real villain is that we have not put in place adequate policies to increase the supply of skilled workers.
For example, we find it odd that the Fed is signaling an overheated labor market when the April activity rate of 62.2% is still below the 63.4% we saw before the pandemic began ( February 2020). Or, for that matter, when the employment-to-population ratio fell to 60% last month, down from 61.2% in February 2020. Do these latest figures showing still significant job shortages really reflect a market overheated work?
And we also find it odd that 5.5% annual wage increases are so alarming for the Fed when even the level is insufficient to keep pace with inflation. The erosion of household purchasing power should itself dampen overall demand in the economy.
Frankly, the percentage growth in real personal consumption expenditure in the first quarter was really no different than it was in the years before the pandemic!
Ah, you could retort, that is precisely the problem. Consumer spending may not have changed much, but the fallout from COVID-19, the war in Ukraine and China’s closures of major cities and ports to fight COVID have led to a global shortage of goods. essential basics. Thus, domestic demand chases less supply and pushes up prices.
We understand that, but the Fed has little control over it. For the Fed to aggressively raise rates and thereby reverse job creation and wage growth just to keep domestic spending in better balance with global supplies seems pre-21st the economy of the century and a certain path to recession.
The two points we raise are: first, the labor market does not appear to be as “hot” as Powell claims, and any effort to limit its growth would only restrict the kind of domestic production that can help offset shortage of basic services. merchandise.
Second, if you want to increase labor supply, Congress needs to take a more active role in easing immigration (e.g. H2B visas) and allocating more funds and/or appropriations to make it easier to train unemployed Americans to get the skills that are in demand these days, whether it’s software engineers or truck drivers.
The strength of the labor market should be viewed as an asset to the US economy, not a liability.
Bernard Baumohl is chief global economist for The Economic Outlook Group in Princeton, NJ