Let’s start with April’s payrolls and then later discuss why we think the Fed is misusing this data to conduct its current monetary policy.
First, we saw another solid increase in payrolls over the past month, with employers hiring an additional 428,000 workers. Almost 519,000 new employees have been hired each month since the beginning of the year – despite the fact that even in this first quarter, labor productivity has fallen by the most since 1947.
Ironically, despite this dismal productivity, average hourly wages still managed to rise 5.5% last month, the second-biggest annual increase in 14 months. It’s interesting that pay has held up so well, especially since average weekly hours have been falling since early 2021.
Overall, the business survey shows that labor market conditions continue to improve, with 55,000 jobs added in manufacturing last month and leisure and hospitality adding another 78,000 to the payroll.
Read: Fewer people are working in schools and local government than before the pandemic – but temp agencies are hiring many
We were hoping 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 fell by as much as 353,000 in the past month, with 363,000 retiring entirely. Based on these two figures, the unemployment rate remained at 3.6%.
More: The one bad thing about the April job report might not be so bad after all
So what is it about the digits that raises new concerns about the current stance of the Fed’s monetary tightening?
First, there seems to be a tendency for the Fed to select data points that essentially highlight the strength of the labor market to justify increasing the pace of monetary tightening. Whether this is a valid criticism or not is debatable. But as an economist, I have to say that it always sounds bizarre when Fed Chair Powell – or any government official – claims that the labor market is too strong. Or as Powell put it, the current job market is “too hot,” even “unsustainably hot.”
It sounds awfully strange. Policy makers typically strive to create an environment that maximizes employment. The more people work, the less the government spends on unemployment benefits, the larger the tax base, and there is plenty of research showing that low unemployment also reduces crime. It’s a win-win situation.
Still, today the Fed sees exceptional strength in the jobs market as a significant source of inflation – and therefore needs to be tempered with higher interest rates.
But the villain here isn’t the forte in hiring Americans. If anything, we view robust employment growth as a way to boost production of goods and services – and thereby ease inflationary pressures.
Look, we understand the Fed’s rationale. Companies are in fierce competition to fill around 11.5 million jobs at a time when fewer than 6 million people are unemployed and actively looking for work. Fed economists fear that efforts to attract and retain this finite pool of unemployed will continue to push up wages, forcing employers to pass on higher labor costs to consumers. Subsequent rises in the cost of living would keep workers demanding even more pay rises, triggering what the Fed fears most — a destructive wage and price spiral.
So it comes down to how you view the villain in this inflation story. Should we slow down the economy and reduce price pressures by suppressing job creation? We don’t think. Technology, robotics, AI and cybersecurity have helped create millions of new jobs to make the economy run much more efficiently.
The real villain is that we don’t have proper policies in place to increase the supply of skilled labor.
For example, we find it strange that the Fed is pointing out an overheated labor market when the labor force participation rate of 62.2% in April is still below the 63.4% we saw before the pandemic hit (February 2020). Or, for that matter, when the employment rate slipped to 60% last month, below February 2020’s 61.2%. Do these latest numbers, which still show large job deficits, really reflect an overheated labor market?
And we also find it odd why annual pay rises of 5.5% are so alarming for the Fed when a steady level isn’t enough to keep up with inflation. The erosion of household purchasing power should in turn cool aggregate demand in the economy.
In all honesty, the percentage growth in real personal consumption spending in the first quarter really wasn’t any different than in the pre-pandemic years!
Ah, you might reply, that’s exactly the problem. Consumer spending may not have changed significantly, but the fallout from COVID-19, the war in Ukraine and China’s lockdown of major cities and ports to fight COVID have created global shortages of critical commodities. So domestic demand is chasing fewer supplies and driving up prices.
We understand that, but the Fed has little control over the latter. That the Fed is aggressively raising rates, eroding job creation and wage growth just to keep domestic spending in better balance with global supply, seems the same as before 21St Century and a certain way into the recession.
The two points we make are these: First, the job market doesn’t appear to be as “hot” as Powell claims, and any attempt to limit its growth would only limit the type of domestic production that can help Lack of raw materials to compensate for goods.
Second, if you want to increase the labor supply, Congress needs to take a more active role in easing immigration (e.g., H2B visas) and allocating more funds and/or tax credits to facilitate training unemployed Americans to do so they can take up employment Skills that are in demand today, be it for software engineers or truck drivers.
The strong labor market should be viewed as a benefit to the US economy, not a drag.
Bernard Baumohl is Chief Global Economist at the Economic Outlook Group in Princeton, NJ
https://www.marketwatch.com/story/the-fed-is-not-only-misreading-the-hot-labor-market-but-also-following-pre-21st-century-thinking-11651868934?rss=1&siteid=rss Opinion: The Fed not only misunderstands the “hot” job market, but also follows pre-21st century thinking