The economy grows by one measure, shrinks by another


Friday’s blowout jobs report may have quelled claims that the U.S. is in a recession, but it didn’t end the mystery about the state of the economy or settle questions about where it’s headed.

Government data showing the economy contracted for a second straight quarter – consistent with an informal definition of recession – was still fresh as the Labor Department said on Friday that employers had added 528,000 jobs in July. That was more than twice as many as economists expected.

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

The first showed a weak economy that – along with the highest inflation in 40 years – offered consumers nothing but grief. The second reflected a glut that was shedding jobs faster than workers could be found to fill them, with unemployment matching the pre-pandemic low of 3.5 percent.

The factors driving inflation higher every month

“It is normal for different economic indicators to point in different directions. The magnitude of the discrepancies right now is unprecedented,” said Jason Furman, former President Barack Obama’s top economic adviser. “It is not just that the economy grows in one measure and shrinks in another. It’s growing incredibly strongly in one way, while shrinking at a pretty decent rate in another.”

In Washington on Friday, President Biden took a victory lap for job growth while claiming credit for gas prices falling for more than 50 days in a row. Yet he also acknowledged the disconnect between the sunny jobs report and the inflationary headache affecting many households.

“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 from a White House balcony. “I know how hard it is. I know it’s hard to feel good about job creation when you already have a job and you’re facing rising prices, food and gas and more. I get it.”

The surprisingly robust jobs number appeared to cast doubt on 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 continue producing half a million new jobs every month. No one believes it could without inflation remains at uncomfortable heights.

Nearly five months after the Federal Reserve began raising interest rates to cool the economy and bring down the highest rate of inflation since the early 1980s, the labor market report showed the nation’s central bank has more work to do. Average hourly wages for private sector workers rose 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 interest 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 deeply negative, acting as a spur to economic growth.

Fed Chairman Jerome H. Powell said last month that further rate hikes are likely when policymakers next meet on Sept. 21. The size of the next increase – either half a percentage point or three-quarters of a point – will “depend on the data we come across 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 key interest rate.

On Wednesday, the government is scheduled to release inflation measurements for July, which are expected to show a modest improvement compared to June’s 9.1 percent, thanks to falling energy prices.

Powell’s decision to stop telegraphing Fed moves by providing “forward guidance” of his plans is itself a sign that the current environment is more uncertain 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] challenging to read through this data,” 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.

The Fed’s interest rate hikes could mark the start of a tough, new economic climate

Almost 22 million Americans lost their jobs between February and April 2020 in the first months of covid. Unemployment hit 14.7 percent, the highest figure recorded by the Labor Department in a streak that began in 1948.

With July’s recovery, the economy has now regained all the lost jobs.

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

Employers are reacting differently than they did before the pandemic to indications that the economy may be slowing, according to Gregory Daco, chief economist for EY-Parthenon. Instead of immediately resorting to significant layoffs, they are instead scaling back hiring or engaging in targeted downsizing.

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

Consumers have also shopped differently, buying more goods than usual while trapped at home during the initial wave of the pandemic. Retailers who ordered unusual quantities of furniture, electronics and clothing from overseas suppliers later misjudged the pace of consumers’ return to traditional buying patterns, leaving stores crammed with unwanted goods.

On top of the ongoing ills of the pandemic, the war in Ukraine has disrupted global commodity markets and contributed to higher inflation.

All these forces combined to produce economic data that is unusual and sometimes contradictory. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new manufacturing jobs created in the month. Still, 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 slightly dizzying business cycle. We get economic data that fluctuates quite quickly, and it’s very difficult to get an accurate read on 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 the Rand Corp.

Friday’s report from the Labor Department tallied how many jobs were gained in July. The last reading of the consumer price index covered June. And gross domestic product, which started the furor of the recession, described 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 how at risk they are for an economic downturn,” she said.

Labor market and output data have told different stories about the economy throughout the 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 data from the Commerce Department.

Still, employers hired 3.3 million new workers during the same period.

How could more workers produce fewer goods and services?

One explanation is that workers are less productive today than in the crisis phase of the pandemic, when companies struggled to keep producing their required orders with fewer workers, Furman said.

In fact, nonfarm productivity fell 7.3 percent in the first quarter, the largest decline since 1947, according to the Bureau of Labor Statistics. Preliminary second-quarter results will be released on Tuesday and are likely to show the biggest two-quarter decline in history, he said.

These figures may overestimate the change. During the pandemic, companies may have been able to maintain output with a Covid-thinned workforce by admonishing or encouraging remaining workers to work harder or longer. But there is a limit to how long managers can motivate people by citing emergencies.

“They worked extra hard, but they didn’t want to work extra hard forever,” Furman said.

World Bank warns global economy could suffer 1970s-style ‘stagflation’

Likewise, the labor force participation rate usually rises when employers add jobs and the unemployment rate falls. But since March, it has declined, according to the Bureau of Labor Statistics.

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

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

Participation by Americans in their prime working years, ages 25 to 54, has almost fully recovered. But for those 55 and older, there has been almost no improvement since the initial plunge at the beginning of the pandemic. And for younger workers aged 20 to 24, participation is lower now than at the end of last year.

“I don’t think we have a good handle on why other workers aren’t coming back,” said Kathy Bostjancic, chief U.S. economist for Oxford Economics. “It’s just such an unusual period.”

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