Why such a hot economy can be good news

When it comes to economics, things get better.

Greater job gains, faster wage growth and higher consumer spending are all, at normal times, signs of a healthy economy. Growth may not be enough to ensure massive prosperity, but it is necessary – any loss of momentum is a worrying sign that the economy may lose steam or worsen into recession.

But these are not normal times. With almost twice as many open jobs and companies struggling to meet record demand as many employees, many economists and policymakers argue that the economy is not what it needs now, but less – less employment, lower wage growth and, above all, lower inflation, which is fast approaching four decades. Running at speed.

Jerome H. Powell, chairman of the Federal Reserve, called the labor market “extremely hot” and said the central bank was raising interest rates to try to cool it. President Biden, who met with Mr. Powell on Tuesday, wrote in an opinion article in the Wall Street Journal this week that the slowdown in job creation would “not be a cause for concern” but rather “a sign that we are successfully moving to the next stage of recovery.”

“We want a full and sustainable recovery,” said Claudia Saham, a former Fed economist who studied the government’s response to the epidemic. “That’s why we can’t take the time of recovery right now – because it’s incomplete – because inflation is so high.”

But a cool economy carries its own risks. Despite inflation, the recovery from the epidemic recession was the strongest on record, with unemployment falling sharply and incomes for the people below recovering the fastest. If the recovery is too slow, it can undo much of that progress.

Georgetown University economist Harry J. “This is what we’re trying to thread the needle into right now,” Holzer said. “We want to give up some of what we’ve achieved.”

Economists do not agree on the best way to strike that balance. Mr Powell, after easing inflation last year, now says curbing it is his top priority – and argues that the central bank can do it without shortening the recovery. Some economists, especially on the right, want the Fed to be more aggressive, even at the risk of a recession. Others, especially on the left, argue that inflation, though a problem, is less bad than unemployment, and that the Fed should take a more cautious approach.

But where progressives and conservatives largely agree that evaluating the economy will be particularly difficult in the next few months. To distinguish a healthy cool-down from a disturbing stall, it is usually necessary to look beyond the headline-making indicators.

Michael R., an economist at the American Enterprise Institute. “This is a very difficult time to interpret economic data and understand what is happening in the economy,” Strain said. “We are entering a time where there is going to be a lot of debate about whether we are in recession right now.”

The May jobs report, which the Department of Labor will release on Friday, will provide a case study on the difficulty of interpreting economic data at the moment.

In general, a number from the monthly report – adding or losing overall jobs – is enough to signal the health of the labor market. Because most of the time the driving force of the labor market is demand. As business grows, employers will seek more workers, and job growth will accelerate. When demand slows, recruitment slows, layoffs increase, and job growth stalls.

At the moment, though, the limiting factor in the labor market is supply, not demand. Employers are keen to hire: there were 11.4 million job opportunities at the end of April, close to a record. But with less than half a million people working or actively seeking work since the epidemic began, employers are scrambling to fill available jobs.

The workforce has grown significantly this year, and forecasters expect more workers to return as the epidemic and the resulting disruption subside. But the epidemic could also trigger long-term changes in Americans’ work habits, and economists aren’t sure when or under what circumstances the labor force will fully recover. Even so, owning one is still beyond the reach of the average person.

Most forecasters expect Friday’s report to show that job growth slowed in May. But this number alone will not reveal whether the discrepancy between supply and demand is getting easier. The slowdown in job growth with a growing workforce could be a sign that the labor market is returning to balance as demand cools and supply improves. But the same level of job growth without increasing the supply of workers could signal the opposite: employers are having a harder time finding the support they need.

Many economists say they will look at labor force participation rates – part of the population is either working or looking for work – just as closely as headline job growth figures in the coming months.

“One can be unequivocally key to higher labor participation,” said Jason Furman, a Harvard economist who was an adviser to President Barack Obama. “Beyond that, nothing is unequivocal.”

Another number will receive much attention from economists, policymakers and investors: wage increases.

Just as employers responded to heated competition for workers, Econ 101 said they should, through wage increases. Average hourly earnings rose 5.5 percent in April from a year earlier, more than double the rate before the epidemic.

In general, a quick wage increase would be good news. The persistently weak pay rise was a dark feature of the long, slow recovery that followed the last recession. But even some economists who lamented this lazy gain at the time said the current rate of wage growth is not sustainable.

“This is something we are used to saying quite unequivocally, but in this case it increases the risk of the economy overheating,” said Adam Ozimek, chief economist at the Economic Innovation Group, a Washington-based think tank. As long as wages are rising at 5 or 6 percent per year, it is impossible to bring inflation down to the Fed’s 2 percent target, he said.

Fed officials are closely monitoring for signs of a “wage-price spiral”, a self-reinforcement pattern where workers expect inflation and therefore demand increases, employers raise prices to compensate. Once such a cycle is caught, it can be difficult to break – a possibility Mr Powell cites to explain why the central bank has become more aggressive in its fight against inflation.

“It’s a risk that we just can’t run,” he told a news conference last month. “We cannot allow a wage-spiral to happen. And we cannot allow inflation expectations to be inconsistent. It’s something we can’t let happen and so we’ll look at it that way. “

Some economists, especially on the left, say there is little evidence that wage growth is feeding inflation, and that wage-price spirals are developing. They claim that the recent pay rise reflects a rare moment in the labor market and that it would be wrong for the Fed to snatch it.

But wages, average, are not keeping pace with inflation, which means many workers are losing ground despite having a strong labor market. In order for workers to improve, their wages must rise after adjusting to inflation – which is almost certainly a reduction in inflation.

“What people are feeling is real,” said Derrick Hamilton, an economist at New School in New York. “A wage increase that’s not so much for raising the price of milk that it doesn’t make you better.”

Mr Hamilton argues that the Fed is right to try to rein in inflation, but that it must formulate its policies recognizing that it will deal with black workers as well as other disadvantaged groups who will suffer the most if recovery fails. “The question that we should ask is who carries the burden,” he said of the Fed’s policy.

Historically, even a slight increase in the unemployment rate almost always indicates the beginning of a recession. If that relationship is to be maintained in the current environment, it suggests that if policymakers want to control inflation without causing a recession, they need to find ways to cool the labor market without cutting back too much.

Mr Powell and other officials argued that this was possible, in part because there were so many jobs available at the moment. In a speech in Germany this week, Christopher J. Waller, a Fed governor, argued that as demand dwindles, employers may start posting fewer jobs before layoffs. This could lead to slower wage growth – as fewer employers try to hire, less competition for workers – without a big increase in unemployment.

Mike Conzal, an economist at the Roosevelt Institute, said:

The Fed’s efforts to cool the economy are already paying off, Mr Kanjal said. Mortgage rates have risen sharply, and as a result, the housing market is showing signs of slowing down. The stock market has lost about 15 percent of its value since the beginning of the year. This loss of assets could result in at least some consumers falling behind in their spending, which could be a pullback in hiring. Job opportunities declined in April, although they remained high, and wage growth has eased.

“There is a lot of evidence that the economy has already slowed down,” said Mr Konjal. He said he was optimistic that the United States was on the path to “normalization into a regular good economy” instead of the boomlike experience of the past year.

But the thing about such a “soft landing”, as Fed officials call it, is still a landing. Wage growth will be slow. Job opportunities will be less. Workers will have lower leverage to claim flexible schedules or other benefits. For the Fed, achieving that result without a recession would be a victory – but it may not seem like much to workers.

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