Why a not-so-hot economy might be good news
When it comes to the economy, more is usually better.
Bigger job gains, faster wage growth and more consumer spending are all, in normal times, signs of a healthy economy. Growth might not be sufficient to ensure widespread prosperity, but it is necessary — making any loss of momentum a worrying sign that the economy could be losing steam or, worse, headed into a recession.
But these are not normal times. With nearly twice as many open jobs as available workers and companies struggling to meet record demand, many economists and policymakers argue that what the economy needs right now is not more, but less — less hiring, less wage growth and above all less inflation, which is running at its fastest pace in four decades.
Jerome Powell, the Federal Reserve chair, has called the labor market “unsustainably hot,” and the central bank is raising interest rates to try to cool it. President Joe Biden, who met with Powell earlier this month, wrote in an opinion article in The Wall Street Journal that a slowdown in job creation “won't be a cause for concern” but would rather be “a sign that we are successfully moving into the next phase of recovery.”
“We want a full and sustainable recovery,” said Claudia Sahm, a former Fed economist who has studied the government's economic policy response to the pandemic. “The reason that we can't take the victory lap right now on the recovery — the reason it is incomplete — is because inflation is too high.”
But a cooling economy carries its own risks. Despite inflation, the recovery from the pandemic recession has been among the strongest on record, with unemployment falling rapidly and incomes rebounding fastest for those at the bottom. If the recovery slows too much, it could undo much of that progress.
“That's the needle we're trying to thread right now,” said Harry Holzer, a Georgetown University economist. “We want to give up as few of the gains that we've made as possible.”
Economists disagree about the best way to strike that balance. Powell, after playing down inflation last year, now says reining it in is his top priority
— and argues that the central bank can do so without cutting the recovery short. Some economists, particularly on the right, want the Fed to be more aggressive, even at the risk of causing a recession. Others, especially on the left, argue that inflation, while a problem, is a lesser evil than unemployment and that the Fed should therefore pursue a more cautious approach.
But where progressives and conservatives largely agree is that evaluating the economy will be particularly difficult over the next several months. Distinguishing a healthy cooldown from a worrying stall will require looking beyond the indicators that typically make headlines.
Slower job growth could be good (or bad).
Recent monthly jobs report provide a case study in the difficulty of interpreting economic data now.
Ordinarily, one number from the monthly report — the overall jobs added or lost — is enough to signal the labor market's health. That is because most of the time, the driving force in the labor market is demand. If business is strong, employers will want more workers, and job growth will accelerate. When demand lags, then hiring slows, layoffs mount and job growth stalls.
Now, though, the limiting factor in the labor market is not demand but supply. Employers are eager to hire: There were 11.4 million job openings at the end of April, close to a record. But there are roughly 500,000 fewer people either working or actively looking for work than when the pandemic began, leaving employers scrambling to fill available jobs.
The labor force has grown significantly this year, and forecasters expect more workers to return as the pandemic and the disruptions it caused continue to recede. But the pandemic may also have driven longer-lasting shifts in Americans' work habits, and economists are not sure when or under what circumstances the labor force will make a complete rebound. Even then, there might not be enough workers to meet the extraordinarily high level of employer demand.
But job growth alone will not reveal whether the mismatch between supply and demand is easing. Slowing job growth coupled with a growing labor force could be a sign that the labor market is coming back into balance as demand cools and supply improves. But the same level of job growth without an increase in the supply of workers could indicate the opposite.
Another number will be getting a lot of attention from economists, policymakers and investors: wage growth.
Employers have responded to the hot competition for workers exactly the way Econ 101 says they should: by raising pay. Average hourly earnings were up 5.5% in April from a year earlier, more than twice the rate they were rising before the pandemic.
Normally, faster wage growth would be good news. Persistently weak pay increases were a bleak hallmark of the long, slow recovery that followed the last recession. But even some economists who bemoaned those sluggish gains at the time say the current rate of wage growth is unsustainable.
“That's something that we're used to saying pretty unequivocally is good, but in this case, it just raises the risk that the economy is overheating further,” said Adam Ozimek, chief economist of the Economic Innovation Group.