The economy grows by one measure, shrinks by another


Friday’s explosives jobs report may have silenced claims that the United States is in a recession, but it hasn’t put an end to the mystery about the state of the economy or resolved questions about where it’s headed.

Government data showing the economy contracted for the second consecutive quarter – meeting an informal definition of a recession – was still fresh, as the Labor Department on Friday said employers added 528,000 jobs to July. It was more than double what economists predicted.

Only eight days separated the two government reports, yet they seemed to describe completely different realities.

The first showed a weak economy which, coupled with the highest inflation of the last 40 years, offered consumers nothing but pain. The second reflected a behemoth that was coining jobs faster than workers could be found to fill them, with an unemployment rate matching the pre-pandemic low of 3.5%.

The factors that drive inflation rising every month

“It is normal for different economic indicators to point in different directions. It’s the magnitude of the discrepancies right now that is unprecedented, “said Jason Furman, President Barack Obama’s former top economic adviser.” It’s not just that the economy is growing to an extent and shrinking in another. It’s growing incredibly loud in one measure while boiling down to a decent enough clip in another. “

In Washington on Friday, President Biden made a victory round for employment growth, claiming credit for gas prices that have fallen for more than 50 consecutive days. Yet he also recognized the disconnect between the solar employment report and the headache of inflation that plagues many families.

“I know people will hear today’s overtime report and say they don’t see it, they don’t hear it in their own lives,” the president said, speaking from a White House balcony. “I know how difficult it is. I know it’s hard to feel good about 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 solid number of jobs seemed to challenge the president’s argument that the economy is going through a “transition” from its fastest growth rates last year to a slower, more sustainable pace.

Nobody expects the economy to continue producing half a million new jobs every month. Nobody thinks it could without inflation staying at uncomfortable levels.

Almost five months after the Federal Reserve began raising interest rates to cool the economy and reduce higher inflation since the early 1980s, the job market report showed that the nation’s central bank has more work to do. The average hourly wage for private sector workers has increased by 5.2% over the past year, suggesting 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%, the highest level in nearly four years. However, in “real” or inflation-adjusted terms, borrowing costs remain profoundly negative, which acts as a stimulus for economic growth.

Fed Chairman Jerome H. Powell said last month that further rate hikes are likely when politicians meet on September 21st. The size of the next increase – half a percentage point or three quarters of a point – will depend on the data we get from now to then, “he told reporters.

The surge in the dollar could help the Fed in the fight against inflation

Investors see a 70% chance of a larger move, according to CME Group, which tracks derivative purchases linked to the central bank’s key rate.

On Wednesday, the government will release inflation readings for July, which are expected to show a modest improvement from the 9.1% figure in June, thanks to falling energy prices.

Powell’s decision to stop telegraphing the Fed’s moves by providing “forward guidance” of his plans is in itself a sign that the current environment is darker than usual.

“Much of what is happening in this economy is driven by the pandemic and therefore the response to the pandemic. And therefore, we are in a very unusual time, in many ways [it’s] It’s hard to read this data, ”Loretta Mester, chairman of the Federal Reserve Bank of Cleveland and a voting member of the Fed’s rate-setting committee, told the Washington Post.

Fed interest rate hikes could mark the beginning of a difficult new economic climate

Nearly 22 million Americans lost their jobs between February and April of 2020 in the first months of covid. The unemployment rate reached 14.7 percent, the highest figure recorded by the Department of Labor in a series that began in 1948.

With July gains, the economy has now made up for all the jobs it lost.

But the workforce has been reshaped. Today, there are more warehouse workers and logistics workers and fewer employees working for hotels and airlines.

Employers are reacting differently than before the pandemic to indications that the economy may slow, according to Gregory Daco, chief economist at EY-Parthenon. Instead of immediately resorting to significant layoffs, they are instead downsizing hiring or engaging in targeted job cuts.

Weekly jobless claims for the first time rose, but only to 260,000 from the 54-year low of 166,000 in March.

Consumers also acted differently, buying more goods than normal while trapped in their homes during the initial wave of the pandemic. Retailers who ordered unusual volumes of furniture, electronics and clothing from overseas suppliers later misjudged the pace of consumers’ return to traditional shopping patterns, leaving stores full of unwanted goods.

In addition to the lingering woes of the pandemic, the war in Ukraine has disrupted global commodity markets, contributing to rising inflation.

All these forces have come together to produce unusual and sometimes contradictory economic data. Friday’s employment report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. However, the beginnings of the real estate sector have declined over the past two months and the latest manufacturing ISM reading was the weakest in two years.

“We are in a rather dizzying economic cycle. We are receiving economic data that fluctuates quite rapidly and it is very difficult to get an accurate reading of where the economy is at any given time, ”said Daco.

Individual data points also provide snapshots of the economy that aren’t synchronized, said Kathryn Edwards, an economist at Rand Corp.

The Department of Labor report on Friday rounded up the jobs earned in July. The latest reading of the consumer price index was for June. And the gross domestic product reading that sparked the fury of the recession described the activity that occurred between April and June – and will be reviewed twice.

“It is a challenge for an economist, but also for a reader who wants to understand how much they are at risk of an economic downturn,” he said.

Labor market and production data have told different stories about the economy throughout the year. After six consecutive months of contraction, the economy is about $ 125 billion less than at the end of 2021, according to inflation-adjusted data from the Commerce Department.

Yet 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 in the emergency phase of the pandemic, when companies struggled to keep producing the required orders with fewer workers, Furman said.

In fact, the productivity of non-agricultural firms in the first quarter fell 7.3 percent, the largest decline since 1947, according to the Bureau of Labor Statistics. Preliminary results for the second quarter will be released on Tuesday and will likely show the largest two-quarter decline in history, he said.

These figures may overstate the change. During the pandemic, companies may have been able to maintain production with a covid-reduced workforce by urging or incentivising the remaining workers to work longer or longer. But there is a limit to how long leaders can motivate people by citing emergency conditions.

“They worked very hard, but they weren’t going to work very hard forever,” Furman said.

The World Bank warns that the global economy could suffer a 1970s-style “stagflation”

Likewise, the labor force participation rate usually rises as employers add jobs and the unemployment rate falls. 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 did not have adequate childcare, remained 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 participation of Americans in their first years of employment, from 25 to 54, has almost completely recovered. But for ages 55 and over, there has been hardly any improvement from the initial slump to the start of the pandemic. And for younger workers, aged 20 to 24, participation is lower than at the end of last year.

“I don’t think we have a good idea why other workers aren’t returning,” said Kathy Bostjancic, US chief economist for Oxford Economics. “It’s just such an unusual time.”

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