Opinion: The Fed doesn’t have a choice anymore. Prepare to slack

Editor’s note: Gad Levanon is the chief economist at the Burnt Glass Institute. He is the past president of the Conference Board’s Labor Market Institute. The opinions expressed in this comment are his own.

For many economists and analysts, the US economy represented a paradox this year. On the one hand, increase in GDP It has slowed significantly, some argue, even entering a recession. On the other hand, overall employment growth was much stronger than usual.

While Gross domestic product It declined at an annual rate of 1.1% in the first half of 2022, and the US economy added 2.3 million Careers In the past six months, much more than in any other six-month period in the 20 years prior to the pandemic.

A tight labor market—and the rapid growth of wages that it stimulated—is causing inflation to become more entrenched. The Consumer Price Index, which measures the basket of goods and services, was 8.3% year-on-year in August. That’s down from a 40-year high of 9.1% in June, but still painfully high. To address it, the Federal Reserve will likely push the economy into recession in 2023, crushing continued job growth.

Why has employment growth remained so strong? First, the US economy is holding on better than many expected. Federal Reserve Board of Atlanta GDP now The estimate of real GDP growth in the third quarter of 2022 is 2.3%, indicating that while Economie It’s growing much slower now than it was last year, and we’re still in the doldrums. When the demand for goods and services increases, the demand for workers who produce these goods and services increases.

Second, despite the slowing economy and growing fears of a recession, layoffs remain historically low. Initial claims for unemployment insurancean indicator closely related to layoffs, was 219,000 for the week ending October 1 – up from the previous week, but still one of minimum readings in recent decades. After years of growing painful labor shortages, many employers are reluctant to significantly reduce the number of workers even as their business slows. That’s because companies worry that they will have trouble hiring new workers when they start to expand again.

Third, a lot Industries It is growing faster than usual as it is still recovering from the epidemic. Organizers of conferences, trade fairs, car rental companies, nursing homes and children’s day care services, among others, are growing very fast because it is still much lower than the pre-pandemic period Employment levels.

Fourth, just as some industries are growing as they are still catching up, others are experiencing high growth as they adjust to the new normal of high demand. the demand For data processing and hosting services, semiconductor manufacturing, mental health services, testing laboratories, medical equipment, and drug manufacturing is higher than it was before the pandemic. These likely represent structural changes to buying patterns that will keep demand high.

Fifth, during the pandemic, companies Investments In software, research and development has reached unprecedented levels, resulting in a rapid increase in new software STEM وظائف Jobs. Since these workers were paid particularly well, they had a lot of income available to spend on goods and services, which supported job growth throughout the economy.

These factors drive positive momentum that will not disappear overnight. Employment growth is likely to slow from its historically high rates, but will remain strong in the coming months. ManpowerGroup’s Employment Outlook Survey It shows that hiring intentions for the fourth quarter are still very high, although down from the previous quarter.

But next year will look very different. Many industries still recovering from the pandemic will have reached pre-pandemic employment levels. With demand saturated, those industries may return to slower hiring. But that alone is unlikely to push job growth into negative territory. What will do is monetary policy.

There are two ways to rein in the labor market: either reduce the demand for workers or increase the supply of labour. But it is difficult to engineer an increase in the supply of labor. This requires the kind of legislative action needed to increase immigration, get people into the workforce or increase investment in workforce training. This is likely to be out of reach in today’s polarized political environment.

The only option that leaves the Fed is to engineer a recession by continuing to raise interest rates. Expect that to happen in 2023.

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