Friday’s jobs report from the U.S. Bureau of Labor Statistics was another humdinger: 428,000 nonfarm workers were added to the lists in April. Job growth was spread across all sectors of the labor market, led by gains in leisure and hospitality, manufacturing and transportation. The unemployment rate remained stable at 3.6%, just 0.1 percentage points from the previous 50-year low just before the pandemic.
The US economy has now recovered 95% of the jobs lost during the COVID-19 recession, which should be good news. And for the 22 million Americans who have returned to work, that’s really good news. But the report also reflects underlying imbalances in the labor market that could cause problems for the wider economy. Specifically, widespread labor shortages are driving up inflation and the Fed may have to administer bitter medicine to control the infection.
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Despite the low unemployment rate, there are still millions of workers who have left the labor force and who would need a significantly higher salary to entice them to return. The Bureau of Labor Statistics produces another employment report called the Job Opening and Labor Turnover Survey which examines labor force participation and employer trends. While survey data lags the jobs report by a month, the March survey found a record 11.5 million U.S. job vacancies, and 4.5 million additional workers left their jobs during the month, also an all-time high.
Meanwhile, the labor force participation rate or share of working-age civilians currently employed or actively seeking work declined to 62.2%. For context, turnout in the early 2000s was consistently above 66%. Economists attribute some of the decline in participation to baby boomer retirements during the pandemic, but that alone does not explain the longer-term trend. The survey data also shows that workers are confident enough to leave unsatisfying jobs much more easily than before the pandemic. There are currently 2 openings for 1 job seeker, also a record. Anecdotal evidence of labor shortages is all around us.
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Although economists disagree on the causes of the ‘great quitting’ of the working population, they recognize that the answer lies in higher wages, which workers have not seen in more than three decades. excluding inflation. Friday’s report showed wages rose 5.5% over the previous 12 months in response to demand for workers, the fastest pace since 2001. However, inflation more than wiped out that gain , with prices rising more than 8% year-on-year. While commodity price inflation is cyclical and can quickly abate, wage inflation is much more rigid and can persist or accelerate rapidly, as we learned from the 1970s. Enter the Federal Reserve.
Inflation had been kept under control for nearly four decades until the pandemic disrupted everything. During the financial crisis of 2006-2008, the Fed always said that it understood and could quickly tame any incipient inflationary pressure, allowing the central bank to exert considerable effort on a stimulus policy to stimulate employment. They were right in this case and inflation did not pick up in response to the massive stimulus. This time around, to fight the COVID-19 recession, the Fed fired a lot more ammunition and even changed policy to encourage slightly higher inflation in the near term to make up for lost time and lost jobs. Now the inflation monster is stirring and the credibility of the central bank is at stake.
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It has become increasingly clear that the ultra-easy money policy has gone on too long and now needs to be reversed faster than the Fed would like. Last week, Fed Chairman Powell announced a half-point hike in his benchmark rate to 1%, but that’s just the appetizer. After years of ensuring that it knows how to control inflation, the Federal Reserve will have to act more aggressively to raise interest rates, knowing that a recession could well ensue. Note that even with the recent increase, the fed funds rate is still negative in real terms after inflation, which means borrowing is essentially free.
Investors had hoped for a less exuberant jobs report to forestall more aggressive rate hikes. They didn’t understand it and the market reacted accordingly. Calming the overheated labor market requires moderating consumer demand, a prospect no one relishes. But for millions of retirees, businesses, workers and consumers, inflation is an insidious demon that destroys value, and its control remains the Fed’s primary responsibility. It’s just a shame when good news turns out to be bad news.
Christopher A. Hopkins is a Chartered Financial Analyst in Chattanooga.