When it comes to economics, more is usually better.
Higher employment gains, faster wage growth and higher consumer spending are, in normal times, signs of a healthy economy. Growth may not be enough to ensure widespread prosperity, but it is necessary, making any loss of momentum a worrying sign that the economy may be losing strength or, worse, heading for 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 nothing more, but less: less hiring, less wage growth and, above all, less inflation, which is running at its fastest pace in four decades.
Federal Reserve Chairman Jerome H. Powell has called the job market “unsustainably hot,” and the central bank is raising interest rates to try to cool it. President Biden, who met with Mr Powell on Tuesday, wrote in an opinion piece this week in The Wall Street Journal that a slowdown in job creation “will not be a cause for concern” but would be ” a sign that we are successfully moving to 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 we can’t turn around victory right now in the recovery, the reason it’s 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 one of the strongest ever, with a rapid fall in unemployment and a faster rise in incomes for those at the bottom. If the recovery slows down too much, it could undo much of that progress.
“This is the needle we’re trying to thread right now,” said Harry J. Holzer, an economist at Georgetown University. “We want to give up as little profit as we can.”
Economists disagree on how best to achieve this balance. Mr Powell, after lowering inflation last year, now says stopping it is his top priority, arguing that the central bank can do so without cutting back on recovery. Some economists, especially 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 take a more cautious approach.
But where progressives and conservatives strongly agree is that assessing the economy will be especially difficult in the coming months. To distinguish a healthy cooling from a worrying stop, one will need to look beyond the indicators that are usually headlines.
“It’s a very difficult time to interpret economic data and even to understand what’s going on with the economy,” said Michael R. Strain, an economist at the American Enterprise Institute. “We are entering a period where there will be a lot of debate about whether we are in recession right now.”
Slower job growth could be good (or bad).
The May employment report, which the Department of Labor will release on Friday, will provide a case study on the difficulty of interpreting economic data right now.
Understand inflation and how it affects you
Normally, a number of the monthly report — global jobs added or lost — is enough to indicate the health of the labor market. This is because most of the time, the engine of the job market is demand. If the business is strong, employers will want more workers and job growth will accelerate. When demand is reduced, hiring slows down, layoffs increase, and employment growth stops.
Right now, however, the limiting factor of the labor market is not demand but supply. Employers are eager to hire: by the end of April there were 11.4 million jobs open, almost a record. But there are about half a million fewer people actively working or looking for work than when the pandemic began, which causes employers to mix to fill available jobs.
The workforce has grown significantly this year, and forecasters expect more workers to return as the pandemic and the disruptions it caused continue to decline. But the pandemic may also have led to more lasting changes in Americans’ work habits, and economists are unsure when and under what circumstances the workforce will fully recover. Even then, there may not be enough workers to meet the employer’s extraordinarily high level of demand.
Most forecasters expect Friday’s report to show that employment growth slowed in May. But that figure alone will not reveal whether the mismatch between supply and demand is shrinking. The slowdown in employment growth along with a growing workforce could be a sign that the labor market is returning to equilibrium as demand cools and supply improves. But the same level of employment growth without increasing the supply of workers could indicate the opposite: that employers have even more difficulty finding the help they need.
Many economists say they will be looking at the labor force participation rate, the proportion of the population working or looking for work, as closely as employment growth figures in the coming months.
“One can be unequivocally rooted in increased labor force participation,” said Jason Furman, a Harvard economist who was an adviser to President Barack Obama. “More than that, nothing else is unequivocal.”
Wage growth may have to slow down.
Another issue will receive a lot of attention from economists, policymakers and investors: wage growth.
Employers have responded to hot competition from workers exactly as Econ 101 says they should, raising wages. Average hourly earnings rose 5.5 percent in April from a year earlier, more than double the rate they had before the pandemic.
Faster salary growth would normally be good news. Persistent and weak wage increases were a hallmark of the long, slow recovery following the last recession. But even some economists who lamented those slow gains at the time say the current pace of wage growth is unsustainable.
“This is something we are used to saying is good, but in this case it only increases the risk that the economy will heat up even more,” said Adam Ozimek, chief economist at the Economic Innovation Group, an organization Washington Research As long as wages go up 5 or 6 percent a year, he said, it will be nearly impossible to reduce inflation to the Fed’s 2 percent target.
Frequently asked questions about inflation
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it does today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transportation and toys.
What causes inflation? It may be the result of increased consumer demand. But inflation can also rise and fall depending on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Rapid price increases pose problems, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation often leads to stock problems. Historically, financial assets in general have gone bad during inflation hikes, while tangible assets such as homes have maintained their value better.
Fed officials are watching closely for signs of a “wage-price spiral,” a self-reinforcing pattern in which workers expect inflation and therefore demand to rise, leading to entrepreneurs to raise prices to compensate. Once this cycle is strengthened, it can be difficult to break, a perspective that Mr. Powell was quoted as explaining why the central bank has become more aggressive in the fight against inflation.
“It’s a risk we just can’t take,” he told a news conference last month. “We cannot allow a wage-price spiral to take place. And we cannot allow inflation expectations to remain unchecked. It’s something we can’t afford to happen, and that’s the way we look at it. “
Some economists, especially on the left, say there is little evidence that wage growth is fueling inflation, let alone that a wage-price spiral is developing. They claim that recent wage gains reflect a rare moment of workers’ power in the labor market, and that the Fed would be wrong to shut it down.
But wages, on average, are not up to date with inflation, which means many workers are losing ground despite the strong labor market. For workers to prosper, their wages must rise after adjusting to inflation, which almost certainly requires inflation to go down.
“What people hear is real,” said Darrick Hamilton, an economist at New York’s New School. “A wage increase that is not as high as the increase in the price of milk does not improve you.”
Hamilton argues that the Fed is right to try to curb inflation, but that it must design its policies with the recognition that it will be black workers, along with other disadvantaged groups, who suffer the most if the recovery fails. “The question we should ask ourselves is who carries the burden” of Fed policies, he said.
Stay tuned for job postings.
Historically, even small increases in the unemployment rate have almost always indicated the onset of a recession. If this relationship is maintained in the current environment, it suggests that if policymakers want to control inflation without causing a recession, they will have to find a way to cool the labor market without causing a large number of layoffs.
Mr. Powell and other officials argue that this is possible, in part because there are so many jobs available now. In a speech in Germany this week, Christopher J. Waller, a Fed governor, argued that as demand slows, employers …