US employers added jobs at a breakneck pace in July, which could spell trouble.
The Labor Department said the U.S. economy added 528,000 jobs in July, far exceeding the 258,000 expected and showing the labor market is not cooling after three rounds of Reserve interest rate hikes. federal.
It is clearly good news that so many Americans have found jobs. The unemployment rate fell to 3.5%, matching the pre-pandemic trough of the Trump economy. The unrounded unemployment rate was 3.458%, making it the lowest rate since the 1970s.
In a low inflation environment with a growing economy, as we experienced it under President Joe Biden’s predecessor, this would unquestionably be good news. In Biden’s economy, delighted by high inflation for four decades and a shrinking economy, there is cause for concern.
The jump in the wage bill was accompanied by a sharp increase in the average hourly wage. More workers and higher wages create more demand in the economy. In the short term, this should drive up core inflation, especially in the services sector. When the Department of Labor releases the consumer price index for July next week, it should show that headline inflation has fallen slightly due to lower gasoline prices, but that inflation is under- underlying will likely continue to rise. Economists see this as particularly worrisome because underlying inflation – inflation minus food and fuel – is a leading indicator of future inflation. So higher core prices mean that inflation will stay higher for longer.
Mass hiring is also an indicator of inflationary forces. Companies hire when they are overwhelmed by demand and 528,000 jobs indicate a tidal wave of demand. The service sector added 402,000 jobs in July, including nearly 100,000 in leisure and hospitality. Education and health services added 122,000 people, the most on record outside of the May-July reopening wave of hiring. Firms that see enough demand to hire that many workers will raise prices, particularly because their own labor and material costs are rising.
No wonder the market is convinced that the Federal Reserve is going to have to keep its foot on the interest rate accelerator until the September meeting. There are even rumors of the possibility of an emergency meeting if the CPI figure is too hot next week, although it seems unlikely that we will get inflation figures high enough for the require.
It is also likely that the jump in employment will translate into another decline in labor productivity. The government measures productivity simply by dividing economic output by hours worked. When the economy contracted in the first quarter as payrolls rose rapidly, productivity fell 7.3%. This is the biggest drop in labor productivity since 1947. We will have the second quarter productivity figure next week and economists expect it to have fallen 4.5%, this which is too optimistic. If the forecast is correct, it will be the worst decline – not counting the previous quarter – since 1981, when productivity fell 5.1%. July’s jump in employment likely means that the third quarter will also see a decline in productivity.
Falling productivity combined with rising wages means labor costs are rising. In the first quarter, unit labor costs – the dollars spent on labor to produce one unit of output – jumped 12.6%. They should increase by 10% in the second quarter. July’s wage gains and the decline in labor productivity that we expect will likely push labor costs up further.
When unit labor costs rise in a low inflation environment, economic theory and empirical studies suggest that the rise does not necessarily push inflation up. In a highly inflationary environment, when inflation expectations are rising and prices have recently spiked, unit labor costs will most likely drive additional inflation. Moreover, when unit labor costs rise because demand for labor has exploded – rather than supply contracting – then they are more likely to contribute to inflation. Moreover, when unit labor costs rise rapidly in the services sector – as they do – they are likely to contribute to inflation because it is more difficult to replace services with imports. or improve productivity through technology.
Some time ago people were talking about the Goldilocks Economy. The idea was that the economy was perfect, neither too hot nor too cold, like when Goldilooks finds the baby bear’s porridge. Today’s employment figures indicate that we may be living in an economy on the other side of history, when Goldilocks wakes up surrounded by the three bears and has to jump out of the window to s escape into the dark forest, never to be heard again.