Let’s begin with April’s employment numbers and then later bring up why, we believe, the Fed wrongly uses this data to carry out its current monetary policy.
First, we saw another solid increase in payrolls last month, with employers adding an additional 428,000 workers. Such hiring has now been averaging nearly 519,000 a month since the start of the year–––this despite the fact labor productivity itself has collapsed in this first quarter by the most since 1947.
Ironically, despite this dismal productivity, average hourly earnings still managed to increase by 5.5% last month, the second largest annual increase in 14 months. The fact that pay has held up this well is interesting, especially since average weekly hours worked has been trending down since the start of 2021.
On the whole, the establishment survey shows labor market conditions continuing to improve, with manufacturing employment adding 55,000, and leisure and hospitality posting another 78,000 to payrolls last month.
We had hoped to find at least some consistency in the household survey, but didn’t quite get it. Here, the total number of people employed in the US actually plummeted by 353,000 last month, with 363,000 dropping out of the labor force completely. Because of these two figures, the unemployment rate held at 3.6%.
So what is it about the job numbers that raises fresh concerns about the present course of Fed monetary tightening?
First, there appears to be a tendency by the Fed to pick and choose data points that essentially highlight the strength of the labor market to justify ramping up the pace of monetary tightening. Whether that is a valid criticism or not is arguable. But as an economist, I must say it always sounds bizarre to hear Fed chair Powell — or any government official — claim the job market is too strong. Or as Powell put it, the current labor market is “too hot,” even “unsustainably hot.”
It sounds terribly odd. Policymakers typically strive to create a backdrop that maximizes employment. With more people at work, the less the government spends on jobless benefits, the larger the tax base, and there’s ample research to show low joblessness also reduces crime. It’s a win – win situation.
Yet the Fed today views the exceptional strength in the labor market as a significant source of inflation — and thus needs to be tamped down with higher interest rates.
But the villain here is not the strength in U.S. hiring. If anything, we view the robust growth in jobs as a way to help increase the output of goods and services — and thus cool inflation pressures.
Look, we understand the Fed’s rationale. Companies are in fierce competition to fill some 11.5 million vacancies at a time when there are less than 6 million people unemployed and actively seeking work. Fed economists worry that efforts to attract this limited pool of unemployed workers and retain existing ones will keep driving wages higher, which then forces employers to pass higher labor costs on to consumers. The subsequent jump in the cost of living would have employees demand even more pay increases and in the process trigger what the Fed fears most of all — a destructive wage and price spiral.
So it depends on how you view the villain in this inflation story. Should we put the brakes on the economy and reduce price pressures by suppressing job creation? We don’t think so. Technology, robotics, AI and cyber security have helped spawn millions of new jobs to help the economy function much more efficiently.
The real villain is that we do not have adequate policies in place to increase the supply of qualified workers.
For example, we find it strange the Fed would point to an overheating job market when April’s labor force participation rate at 62.2% is still short of the 63.4% we saw before the onset of the pandemic (February 2020). Or, for that mater, when the employment population ratio last month slipped to 60%, below the 61.2% in Feb. 2020. Do these latest figures still showing major employment shortfalls really reflect an overheated job market?
And we also find it strange why annual pay increases of 5.5% is so alarming to the Fed when even level is insufficient to keep pace with inflation. The erosion in household purchasing power should itself cool overall demand in the economy.
Frankly, the percentage growth in real personal consumption expenditures in the first quarter was really no different than what it was in the years prior to the pandemic!
Ah, you might counter, that this is precisely the problem. Consumer spending may not have changed much but the fallout from COVID-19, the war in Ukraine and the China’s lockdowns of major cities and ports to combat COVID has led to a global scarcity in critical commodities. So domestic demand is chasing fewer supplies and driving up prices.
We get that, but the Fed has little control over the latter. For the Fed to aggressively raise rates and thus subvert job creation and wage growth just to keep domestic spending in better balance with global supplies seems like pre-21st century economics and a certain path to recession.
The two points we’re making is this: first, the labor market does not appear to be as “hot” as Powell claims and any effort to restrict its growth would only restrain the kind of domestic production that can help offset the shortage in basic commodities.
Second, if you want to increase the supply of labor, Congress has to take a more active role in loosening up immigration (e.g., H2B visas) and allocating more funds and/or tax credits to facilitate the training of jobless Americans so they can acquire the skills that are in demand these days, whether it be for software engineers or truck drivers.
The strong job market should be viewed as an asset for the U.S. economy, not a liability.
Bernard Baumohl is chief global economist for The Economic Outlook Group in Princeton, N.J.