By Edouard Wemy
The hot U.S. labor market is showing few signs of cooling down, with the latest jobs report showing continued strong gains, particularly in service industries such as retail and hospitality. The robust employment landscape may put pressure on the Federal Reserve to raise rates more than expected later this month in a bid to further tame inflation.
The U.S. economy added 311,000 jobs in February, the Bureau of Labor Statistics reported on March 10, 2023, higher than economists were forecasting. The unemployment rate ticked up slightly to 3.6%, still near the lowest level in over 50 years.
To better understand what all this means and why the job market remains strong despite the most aggressive pace of interest rate hikes since the 1980s, we turned to Edouard Wemy, an economist at Clark University.
What stood out for you most in the jobs report?
It’s kind of strange how the labor market remains quite strong, with notable gains in labor-intensive service sectors like hospitality and leisure, health care and retail. That’s also where wage growth in February was strongest.
For workers, the report is good news, since it suggests if you’re looking for work you’ve got a strong chance of finding a job. The Job Openings and Labor Turnover Survey shows that there are almost two vacancies for every unemployed worker, which is pretty high compared with an average of under 0.6 vacancies per jobless person before the pandemic.
But it’s very puzzling. Why is the job growth so strong at a time when the Fed has been aggressively raising borrowing costs to tame the highest inflation since the 1980s? Typically, a sudden increase in interest rates – and the Fed has raised rates 4.5 percentage points over the past year – would chill the labor market and send unemployment much higher.
I believe, as is often the case in economics, it’s a question of supply and demand. The Fed has been focused on the latter. Raising the borrowing costs consumers and businesses have to pay should reduce consumer demand for goods and services, which in turn lowers demand for workers.
But the Fed can’t do much about the supply side of the equation – which refers to the number of available workers in the labor market. That’s measured by the participation rate, which plunged at the beginning of the pandemic and still hasn’t fully recovered to pre-COVID-19 levels. This is especially true for men, who are participating in the labor market at a rate of 68%, or 1.1 percentage point below February 2020 levels – the equivalent of about 1.5 million men gone from the workforce.
In other words, if the reason the job market is so tight right now is the relatively low participation rate, then that explains why the Fed’s interest rate hikes are not having much of an effect.
Why is the participation rate still low?
Economists, me included, are trying to work that out and have some theories.
The pandemic caused significant disruptions to the labor market – first, lockdowns caused unemployment to soar, then trillions of dollars in government aid meant to support the economy made it easier to get by without a job – and this has resulted in structural changes that persist today.
Recent research suggests part of the explanation for the lower participation rate is that more younger workers may be joining the gig economy, which isn’t fully reflected in the government’s job and participation numbers.
What does this mean for Fed’s rate-hike campaign?
A few weeks ago markets were expecting the Fed to lift interest rates by another quarter-point when it meets on March 21-22. That changed after Fed Chair Jerome Powell told Congress on March 7 that the rate-hiking campaign still “has a long way to go.”
After the latest jobs report showed the strength of the labor market, I agree that a half-point increase is likely. But I’m hoping the Fed isn’t going to push up rates much more.
If the reason for the hot jobs market is primarily a supply or structural issue, then higher rates aren’t going to have the effect the Fed seeks – and would only increase the odds of recession. So I’m hoping the Fed’s economists recognize this and adjust their strategy.
What are the odds of a recession?
I still don’t think a recession is likely, mainly because recent economic data, such as solid consumer spending along with the latest jobs report, have been so strong. But also I do believe the Fed will change its tune, accept inflation may be a bit higher than it hopes and slow the pace of rate hikes.
But if the Fed stays focused on driving inflation to near its target of 2% – from an annual pace of 6.4% currently – that would greatly increase the odds of a recession this year or the next.
Edouard Wemy, Assistant Professor of Economics, Clark University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Edouard Wemy is Assistant Professor of Economics at Clark University.
The Conversation arose out of deep-seated concerns for the fading quality of our public discourse and recognition of the vital role that academic experts could play in the public arena. Information has always been essential to democracy. It’s a societal good, like clean water. But many now find it difficult to put their trust in the media and experts who have spent years researching a topic. Instead, they listen to those who have the loudest voices. Those uninformed views are amplified by social media networks that reward those who spark outrage instead of insight or thoughtful discussion. The Conversation seeks to be part of the solution to this problem, to raise up the voices of true experts and to make their knowledge available to everyone. The Conversation publishes nightly at 9 p.m. on FlaglerLive.
We’re in a war economy
That checks out:
This article is from a fantasy land?
Ray W. says
Thank you, Betty, for ending your comment with a question mark. I infer from your punctuation choice that you acknowledge that no one can tell the future and that a measure of fantasy inheres in all economic predictions. And it is a safe choice for you to use a question mark, because you can never be said to be wrong. Perhaps less right than you could be, but not wrong.
Can it be argued that all economic theories are nothing more than models, i.e., algorithms, which input massive amounts of previously generated statistically accurate data, with the economist who is building the model attaching values she selects to the data that she will input into the model, values that she hopes will provide a barometer that more accurately portrays the current and possible future state of the economy than do models prepared by other economists (just picture all of the different hurricane tracking models used by NOAA and understand that each tracking model has access to the same data, but each uses different valuations in order to better interpret the data)?
As support for this assertion, I point to Reagan’s “supply side” economic theory from the early 1980’s, based on an economic model created by David Stockman.
As an aside, I looked up the definition of algorithm, which is “a process or set of rules to be followed in calculations or other problem-solving operations, especially by computer.” I also looked up synonyms for “algorithm.” Method, formula, theorem, process, model, and design were among many other listed synonyms.
Stockman was not the only economist who advocated for a supply side macroeconomic approach to tax strategy, nor was he the first. After all, the theory is based on a lowering of tax rates, a limiting of the regulatory atmosphere, and emphasis on expanding the parameters of free trade, with a corresponding rise in economic productivity. Supply-side theory is not the problem. The problem comes from the values that an economist attaches to various data points that are fed into the economic model. Garbage in/garbage out, as it were.
A few years after the Reagan experiment in supply side economics, Stockman admitted that he had loaded his economic model with flawed economic assumptions. The interpretations he drew from the data he had inputted into his unique model had allowed him to testify as an expert economic witness that Reagan’s proposed reorganization of America’s tax code would work in a certain way. Reagan used Stockman’s model as proof that a significant tax code rewrite would so stimulate the economy that the rising tide would float all boats.
Critics of Stockman model labeled the theory “trickle-down economics”, but that is not really an accurate evaluation. Stockman later admitted that his assumed values were in error, but only after the predictions he had testified about had simply not come to pass; he had to admit that the values he used in his model were wrong. That did not prove that supply-side economics was wrong. Indeed, various Republican controlled Congresses and presidential administrations have repeatedly tried new versions of supply-side economic models, but each has failed to meet the politically predicted economic growth. Again, not because the theory is wrong (it is less right than it could be, but it cannot be said to be wrong, as any tax cut will theoretically stimulate an economy), but because the values inserted into each new economic model had proven erroneous. One of those other examples, the Trump administration economic model behind its proposed tax cut as follows: The proposed tax cut would so stimulate the economy that GDP growth over the next 10 years would average 4% per year. The additional taxes imposed on the extra income triggered by the massive overall GDP growth would more than offset the predicted loss of tax revenue caused by the lower tax rates. Of course, the model did not work as proposed and we did not average anywhere near the predicted 4% per annum growth over the 10-year span, but the problem was with the values used in the model, not the overall theory.
At this point, every FlaglerLive reader should consider the fact that while witnesses are sworn to tell the truth whenever they testify under oath, including economists testifying to Congress, politicians do not swear to tell the truth when they accept the powers inhering in the office to which they have been elected or appointed. Indeed, our Constitution prohibits prosecution, either civilly or criminally, of any member of Congress for whatever they say in their role of congressional member. Our founding fathers thought that a free and open system of argumentation was more important than truthful senators and representatives. They so desired zealous advocacy, based on intellectual rigor, that they were willing to risk the possibility that pestilential partisan members of faction would come to dominate government. They installed checks and balances into every power granted to their fledgling liberal democratic Constitutional republic to limit the possibility that pestilential partisan members of faction would ever prevail, but that does not lessen the importance of their experiment with zealous advocacy.
To the point of the article, the author defines issues and then poses questions to an economist, who offers cautious predictions of future economic conditions. It seems to me that both the author and the economist are well aware of the fact that no one can predict the future, particularly one possible macroeconomic future. Since I agree with that approach, I agree with the caution exhibited in the article.
Is there another way to view the issue of relying on economic models to attempt to predict the future state of the economy, in the context of economic modelling and the assumptions made and conclusions drawn from previously collected statistically accurate data?
Several weeks ago, I was intrigued by a short interview of Raphael Bostic, the president of the Atlanta Fed. I had just read a different article in which the author had used the German term “zeitenwende” to illustrate a point. Zeitenwende means: “an epochal turning point.” In his answers to a reporter, Bostic posed several economic sticking points:
1. “jobs have come in stronger than expected.”
2. “inflation is remaining stubborn at elevated levels.”
3. “consumer spending is strong.”
4. “labor markets remain quite tight.”
Each of these four economic sticking points suggests that the values attached to the data points in currently accepted economic models are less accurate than they could be. If so, does that mean that the values used in the algorithms need to be updated or modified in order to obtain more accurate results or conclusions? Would an epochal economic turning point cause an unbalancing of the values used in economic modeling predictions? If so, could a worldwide pandemic, coupled with two international crude oil disruptions (one caused by one nation’s war of aggression and the other caused by a cartels manipulation of the energy marketplace for economic gain) and a worldwide wheat shortage also caused by that one nation’s war of aggression, trigger that epochal turning point?
As foundation, I point out that standard economic theory over the last 60 years or so holds that whenever inflation begins to rise more rapidly than expected, the unemployment rate also rises. This correlation explains why so many economists began predicting recession near the end of the Trump administration, when inflation began to rise after the various stimulus packages signed into law by then-President Trump began to take effect, and then continued to rise when additional stimulus packages were signed into law by President Biden. Yet recession has not occurred, though I readily concede that it can still occur. After all, it is reported that the many large and small stimulus bills signed into law by both presidents total some $6 trillion and that around $4 trillion has actually been spent over the last three years. An additional $2 trillion in stimulus funds can certainly heat an economy and spur additional inflation.
Although the open jobs report for January reflects 10.8 unfilled job postings, it is down from just over 11.0 million open jobs in December. However, that number has changed very little over the last year.
Filings for unemployment insurance were 190k for the week ending February 25th, with a four-week moving average of 191.5k. The average weekly filings for unemployment insurance since the late 1960’s is over 368k per week. The unusually low filings totals have lasted for an extended period of time.
The ratio of open jobs to unemployed workers is 1.9 to 1, more than double the normal rate of 0.8 open job per unemployed worker.
The unemployment rate for February is 3.6%. January’s figure was 3.4%. Traditionally, a full labor market carries a 3.5% unemployment figure.
In a full labor economy, we need to add some 120k jobs per month just to keep up with our growing population, but we added 7.1 million jobs in 2021, 4.6 million new jobs in 2022, and well over 800k new jobs in the first two months of 2023.
None of these traditional economic figures explains an economy in or approaching recession. None of these traditional figures should exist in an economy carrying a stubbornly high inflation rate. Yet, these figures exist.
To me, this provokes a great question. What if the total size of all of the stimulus packages signed into law since early 2020 is so large as to fall outside the boundaries of all of our nation’s previous stimulus packages which, in turn, has upended the validity of our traditional economic modeling values?
Economists have long argued over what should be the optimum size of any stimulus package during an economic upheaval, though few seem to argue about the need for stimulus packages whenever the economy suffers a shock. Indeed, in 2020, a Republican-controlled Senate passed a $1 trillion stimulus package on a 96-0 vote, with then-President Trump signing it into law and his administration then beginning the huge undertaking of implementing how that $1 trillion could best be introduced into the economy. For about a decade now, economists have argued whether the $770 billion TARP Act, signed into law by W. in response to the mortgage crisis, was big enough. Many economists argue that a larger stimulus package would have cut years off the recovery time needed to return to a fully functioning economy under President Obama. But no precedent exists for a $6 total stimulus package.
Since no administration or pair of administrations has ever attempted to implement a $6 trillion total stimulus package, can it be argued that the American economy is undergoing an unprecedented experiment? Could this explain why the correlation between jobs and inflation is not occurring? That consumer spending remains relatively strong? That labor markets remain unusually tight? That open jobs are not being filled? That seemingly large tech sector job layoffs are not being reflected by rising filings for unemployment insurance?
Is it possible that no economic model currently in existence can accurately predict where our economy will land next month, due to an epochal economic turning point? Next year? Next decade? That no economist possesses the experience, wisdom and training to adequately and accurately determine the values to be used in the algorithms currently in existence in order to reliably produce conclusions about our current economic state? That the best an economist can do today is guess? Is this what happens in epochal economic turning points? Kind of gives Betty’s question mark new importance! Oy vey!
Padding the numbers to make themselves look good. IMO
Pierre Tristam says
Do you say the same about Florida’s job numbers?