Only eight days separated the two government reports, yet they seemed to describe completely different realities.
The first showed a weak economy that – coupled with the highest inflation in 40 years – caused consumers nothing but grief. The second reflected a juggernaut creating jobs faster than workers could be found to fill them, with an unemployment rate matching the pre-pandemic low of 3.5 percent.
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“It is normal for different economic indicators to point in different directions. It is the magnitude of the discrepancies that is unprecedented at this point,” said Jason Furman, former top economic adviser to President Barack Obama. “It’s not just that the economy is growing on the one hand and contracting on the other. It grows incredibly strong on one side, while in another it shrinks at a pretty decent clip.
In Washington, President Biden took a job-growth victory round on Friday as he took credit for gas prices falling for more than 50 consecutive days. But he also acknowledged the discrepancy between the sunny employment report and the inflation headache that many households are battling.
“I know people will hear today’s extraordinary jobs report and say they don’t see it, they don’t feel 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 you’re dealing with rising prices, food and gas, and much more. I get it.”
The surprisingly robust job count seemed to call into question the president’s argument that the economy is undergoing a “transition” from last year’s faster growth rates to a slower, more sustainable pace.
No one expects the economy to continue producing half a million new jobs every month. No one thinks it could be without inflation remaining at uncomfortable levels.
Nearly five months after the Federal Reserve began raising interest rates to cool the economy and curb the highest inflation rate since the early 1980s, the labor market report showed the country’s central bank has more work to do. Average hourly wages for private sector workers have risen 5.2 percent over the past year, suggesting the kind of wage-price spiral the Fed is determined to prevent.
Last month, the Fed raised its benchmark rate to a range of 2.25 percent to 2.5 percent, the highest level in nearly four years. But in “real” or inflation-adjusted terms, borrowing costs remain very negative, spurring economic growth.
Fed Chair Jerome H. Powell said last month additional rate hikes are likely when policymakers meet on Sept. 21. we get between now and then,” he told reporters.
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Investors see a 70 percent chance of the bigger move, according to CME Group, which tracks purchases of derivatives tied to the central bank’s policy rate.
On Wednesday, the government will release inflation figures for July, which are expected to show a modest improvement from June’s 9.1 percent figure, thanks to falling energy prices.
Powell’s decision to stop telegraphing Fed moves by providing “forward guidance” to its plans is itself a sign that the current environment is darker than usual.
“Much of what is happening in this economy is being driven by the pandemic and then the pandemic response. And so we are in a very unusual time, in many ways [it’s] a challenge to read that data a little bit,” Loretta Mester, president of the Federal Reserve Bank of Cleveland and a voting member of the Fed’s Interest Rate Committee, told The Washington Post this week.
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Nearly 22 million Americans lost their jobs between February and April 2020 in the early 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’s gains, the economy has now recovered all the lost jobs.
But the workforce has been reformed. Today there are more warehouse and logistics employees and fewer employees for hotels and airlines.
According to Gregory Daco, chief economist at EY-Parthenon, employers are reacting differently than before the pandemic to indications that the economy is slowing. Instead of immediately resorting to significant layoffs, they are instead scaling back hiring or taking targeted job cuts.
Weekly first-time unemployment claims have risen, but only to 260,000 from a 54-year low of 166,000 in March.
Consumers have also acted differently by buying more goods than usual while locked in their homes during the first wave of the pandemic. Retailers who ordered unusual quantities of furniture, electronics and clothing from foreign suppliers later misjudged the rate at which consumers reverted to traditional purchasing patterns, leaving stores full of unwanted goods.
In addition to the ongoing ills of the pandemic, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.
All these forces combine to produce economic data that is unusual and sometimes contradictory. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. Still, house prices have fallen over the past two months and the latest ISM production reading was the weakest in two years.
“We are in a somewhat dizzying business cycle. We get economic data that fluctuates quite quickly and it’s very difficult to read exactly where the economy is at any given moment in time,” Daco said.
Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at the Rand Corp.
The Labor Department’s report on Friday tallied the jobs won in July. The last reading of the consumer price index was in June. And the gross domestic product reading that kicked off the recession furore described the activity that took place 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 the risk of an economic downturn,” she said.
Labor market and output data tell different stories about the economy throughout the year. After six consecutive months of contraction, the economy is about $125 billion smaller than at the end of 2021, according to inflation-adjusted data from the Department of Commerce.
Yet, over the same period, employers hired 3.3 million new workers.
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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.
According to the Bureau of Labor Statistics, nonfarm productivity fell 7.3 percent in the first quarter, the largest drop since 1947. Preliminary results for the second quarter will be released Tuesday and will likely be the largest drop in two quarters in history, he said.
Those numbers may exaggerate the change. During the pandemic, companies may have been able to maintain production with a covid-thinned workforce by urging or incentivising the remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by calling emergencies.
“They worked extra hard, but they wouldn’t work extra hard forever,” Furman said.
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Similarly, the employment 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 retired rather than risk working during the pandemic. Others – mostly women – who had insufficient childcare facilities stayed 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 prime working years, ages 25 to 54, has almost fully recovered. But for people over 55, there has been almost no improvement since the first plunge at the start of the pandemic. And for younger workers aged 20 to 24, participation is now lower than at the end of last year.
“I don’t think we have a good idea why other workers aren’t coming back,” said Kathy Bostjancic, chief US economist for Oxford Economics. “It’s just such an unusual period.”