The economy is growing in one measure and shrinking in the other

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Friday’s burnout report may have silenced claims that the United States is in recession, but it has not solved the mystery of the state of the economy, nor has it solved questions about where it is going.

Government figures showing the economy contracted for the second consecutive quarter – meeting one informal definition of a recession – were still relevant as the Labor Department on Friday said employers added 528,000 jobs in July. This is more than twice as much as economists expected.

The two government reports were only eight days apart, but they seemed to describe a completely different reality.

The first showed a weak economy, which – combined with the highest inflation in 40 years – offered consumers nothing but regret. The second mirrored the juggernaut who worked faster than the workers who could fill them, with an unemployment rate on par with the one before the pandemic of 3.5 percent.

Factors increasing inflation from month to month

“It is normal for different economic indicators to point in different directions. The size of the current discrepancies is unprecedented, ”said Jason Furman, former economic adviser to President Barack Obama. “It’s not just that the economy is growing in one measure and contracting in another. In one degree it grows incredibly strong, and in another it shrinks for a pretty decent clip. “

In Washington on Friday, President Biden achieved the winning lap in job growth while claiming gas prices had fallen for more than 50 consecutive days. However, he also admitted the discrepancy between the solar employment report and inflationary headaches that affect many households.

“I know people will hear reports of today’s extraordinary work and say they don’t see it, don’t feel it in their lives,” said the president, speaking from the balcony of the White House. “I know how difficult it is. I know it’s hard to feel comfortable creating jobs when you already have a job and grapple with rising prices, food, gas and much more. I see.”

The surprisingly high number of jobs seemed to call into question the president’s argument that the economy was “transitioning” from last year’s faster growth rate to a slower, more sustainable pace.

Nobody expects the economy to create half a million new jobs each month. Nobody thinks it would be possible without inflation remaining at uncomfortable heights.

Almost five months after the Federal Reserve began raising interest rates to cool down the economy and bring down the highest inflation since the early 1980s, a labor market report found that the national central bank had more work to do. Average hourly earnings of private sector workers have risen 5.2 percent over the past year, pointing to the kind of wage and price spiral that 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%, the highest level in almost four years. However, in ‘real’ or inflation-adjusted terms, borrowing costs remain deeply negative, spurring economic growth.

Fed chairman Jerome H. Powell last month said additional rate hikes were likely when policymakers met on September 21. we’ll get in from now until then, “he told reporters.

A rising dollar can help the Fed fight inflation

Investors see a 70 percent chance of more movement, according to the CME Group, which tracks the purchases of derivatives linked to the central bank’s main rate.

The government is expected to announce inflation readings for July on Wednesday, which are expected to show a slight improvement from 9.1 percent in June, thanks to falling energy prices.

Powell’s decision to stop telegraphing the Fed’s moves by providing “as-is-clues” about his plans is in itself a sign that the current situation is darker than usual.

“Much of what is happening in this economy is driven by the pandemic, followed by the pandemic response. And so we are at a very unusual time, in many ways [it’s] difficult to read these figures to some extent, ”Loretta Mester, president of the Cleveland Federal Reserve Bank and a voting member of the Fed’s interest rate committee told The Washington Post earlier this week.

Fed interest rate hikes could spell the beginning of a difficult new economic climate

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

Thanks to the boom in July, the economy has regained all lost jobs.

But the labor force has been transformed. Currently, there are more warehouse and logistics employees, and fewer employees work in hotels and airlines.

According to Gregory Daco, chief economist at EY-Parthenon, employers react differently from before the pandemic to signals that the economy may be slowing down. Instead of immediately resorting to significant layoffs, they instead cut jobs or engage in targeted job cuts.

Weekly unemployment claims rose for the first time, but only to 260,000, from their lowest level in 54 years at 166,000 in March.

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

In addition to the persistent ills of the pandemic, the war in Ukraine disrupted global commodity markets, contributing to higher inflation.

All of these forces have come together to produce economic data that is remarkable and sometimes contradictory. Friday’s employment report showed 32,000 new jobs in construction and 30,000 new jobs in factories created during the month. However, the number of house starts has fallen in the last two months and the latest ISM reading for industry has been the weakest in two years.

“We’re in a somewhat dizzying business cycle. We get economic data that changes quite quickly and it is very difficult to read exactly where the economy is at any given time, ”said Daco.

Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at Rand Corp.

Friday’s Labor Department report summarized the number of jobs gained in July. The last reading of the consumer price index was for June. And the gross domestic product reading that started the fury of the recession described the activity that took place between April and June – and will be revised twice.

“This is a challenge for the economist, but also for the reader who wants to understand how much they are at risk of an economic slowdown,” she said.

Data from the labor market and production told different stories about the economy throughout the year. After six consecutive months of contraction, the economy is about $ 125 billion smaller than it was at the end of 2021, according to the Department of Commerce’s inflation-adjusted data.

However, in the same period, employers hired 3.3 million new employees.

How can 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 maintain the required orders with fewer workers, Furman said.

Indeed, non-farm business productivity fell by 7.3 percent in the first quarter, the largest drop since 1947, according to the Bureau of Labor Statistics. He said preliminary results for the second quarter will be announced on Tuesday and are likely to show the biggest decline in history in two quarters.

These numbers can overestimate the change. During the pandemic, companies were able to sustain production with a lean labor force, by encouraging or encouraging other workers to work harder or longer. But there is a limit to the amount of time bosses can motivate people by citing emergencies.

“They worked very hard, but they wouldn’t work extremely hard forever,” said Furman.

The World Bank warns that the world economy may suffer in the style of ‘stagflation’ in the style of the ’70s.

Likewise, the participation rate tends to increase as employers add jobs and the unemployment rate decreases. But it has declined since March, according to the Bureau of Labor Statistics.

Some Americans have retired instead of risking their jobs during the pandemic. Others – mostly women – who lacked adequate childcare stayed at home with young children or other sensitive relatives.

In an April article by economists at the Federal Reserve Bank in Richmond, it was stated that “the pandemic has permanently reduced economic share.”

Americans’ share of prime-time working years, aged 25 to 54, has almost completely improved. But for those 55 and older, there was hardly any improvement from the initial decline at the start of the pandemic. And for younger workers, aged 20-24, participation is now lower than at the end of last year.

“I don’t think we understand well why other employees don’t come back,” said Kathy Bostjancic, chief economist at Oxford Economics. “This is such an amazing period.”

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