The economy is growing to one extent, shrinking to another


Friday’s jobs report may have quelled 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 had contracted for the second straight quarter — meeting an informal definition of a recession — was still fresh, as the Labor Department said on Friday that employers had added 528,000 jobs in July. That was more than double what economists expected.

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

The first showed a weak economy which, coupled with the highest inflation in 40 years, offered consumers nothing but pain. The second reflected a behemoth that was 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’s the magnitude of the discrepancies right now that is unprecedented,” said Jason Furman, a former senior economic adviser to President Barack Obama. “It’s not just about the economy growing by one measure and shrinking by another. It’s growing incredibly strong on one measure while shrinking at a pretty decent rate on another.”

In Washington on Friday, President Biden took a victory lap for job growth and took credit for gasoline prices declining for more than 50 straight days. However, he also acknowledged the disconnect between the sunny jobs report and the inflation headaches that plague many households.

“I know people will listen to 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 are dealing with rising prices, food and gas, and so much more. I get it.”

The surprisingly strong jobs number seemed to call into question the president’s argument that the economy is undergoing a “transition” from its faster growth rates last year to a slower, more sustainable pace.

No one expects the economy to keep generating half a million new jobs every month. No one thinks it could do it without keeping inflation at uncomfortable heights.

Nearly five months after the Federal Reserve began raising interest rates to cool the economy and reduce the highest inflation since the early 1980s, the labor market report showed the nation’s central bank has more work to do. to do. Average hourly earnings for private-sector workers rose 5.2 percent over the past year, suggesting the kind of wage-price spiral the Fed is determined to avoid.

Last month, the Fed raised its benchmark interest rate to a range of 2.25 percent to 2.5 percent, its highest level in nearly four years. However, in “real” or inflation-adjusted terms, borrowing costs remain deeply negative, acting as a spur to economic growth.

Fed Chairman Jerome H. Powell said last month that additional rates are likely to rise when policymakers meet on Sept. 21. The size of the next increase, whether it’s half a percentage point or three-quarters of a point, “will depend on the data.” we have between now and then,” he told reporters.

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

On Wednesday, the government is due to release July inflation readings, 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 the Fed’s moves by providing “forward guidance” on its plans is itself a sign that the current environment is murkier than usual.

“A lot of what’s happening in this economy is being driven by the pandemic and then the response to the pandemic. And so we’re in a very unusual time, in many ways. [it’s] hard to read that data,” Loretta Mester, president of the Federal Reserve Bank of Cleveland and a voting member of the Fed’s rate-setting 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 first few 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 the July gains, the economy has now regained all of the jobs lost.

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

Employers are reacting differently than they did before the pandemic to signs the economy may be slowing, according to Gregory Daco, chief economist at EY-Parthenon. Instead of immediately resorting to significant layoffs, they are reducing hiring or engaging in targeted job cuts.

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

Consumers have also acted differently, buying more goods than usual while stuck at home during the initial wave of the pandemic. Retailers who ordered unusual volumes of furniture, electronics and apparel from foreign suppliers then misjudged the pace of consumers’ return to traditional shopping patterns, leaving stores overflowing with unwanted products.

Adding to the lingering woes of the pandemic, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.

All of these forces combined to produce unusual and sometimes contradictory economic data. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. However, housing starts have fallen in the past two months and the latest ISM manufacturing reading was the weakest in two years.

“We are in a somewhat dizzying business cycle. We are getting 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,” Daco said.

Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at Rand Corp.

Friday’s Labor Department report tallied jobs gained in July. The latest reading of the consumer price index covered June. And the gross domestic product reading that kicked off the recession rage outlined activity that occurred 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 they are running in an economic downturn,” he said.

Production and labor market data have been telling different stories about the economy all year. After six straight months of contraction, the economy is about $125 billion smaller than it was at the end of 2021, according to inflation-adjusted Commerce Department data.

However, employers have hired 3.3 million new workers during that same period.

How is it possible that more workers produce fewer goods and services?

One explanation is that workers are less productive today than they were during the emergency phase of the pandemic, when companies were struggling to keep producing required orders with fewer workers, Furman said.

In fact, nonfarm business productivity in the first quarter fell 7.3 percent, the biggest drop since 1947, according to the Bureau of Labor Statistics. Preliminary second-quarter results are due Tuesday and are likely to show the biggest two-quarter drop in history, he said.

Those figures may exaggerate the change. During the pandemic, companies may have been able to maintain production with a reduced Covid workforce by encouraging or incentivizing remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by citing emergency conditions.

“They worked really hard, but they wouldn’t do it forever,” Furman said.

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Also, the labor force participation rate typically rises when employers are adding jobs and the unemployment rate is falling. But since March it has fallen, according to the Bureau of Labor Statistics.

Some Americans have retired rather than risk working during the pandemic. Others, mostly women, who lacked adequate childcare, stayed home with young children or other vulnerable relatives.

An April article by economists at the Richmond Federal Reserve Bank found that “the pandemic has permanently reduced participation in the economy.”

The share of Americans in their prime working years, ages 25 to 54, has almost fully recovered. But for those over 55, there has been almost no improvement since the initial drop at the start of the pandemic. And for younger workers, ages 20 to 24, the turnout is lower now than it was at the end of last year.

“I don’t think we know very well why other workers aren’t coming back,” said Kathy Bostjancic, chief US economist at Oxford Economics. “It’s such an unusual period.”

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