February Jobs Report: Economy “Rising Like a Phoenix”
Dr. Bernard E. Anderson
Whitney M Young, Jr. Professor Emeritus, The Wharton School, University of Pennsylvania
Senior Economic Advisor, National Urban League
The U.S economy added 678,000 new jobs in February, the unemployment rate dipped down to 3.8 percent, and more than 300,000 workers were added to the labor force.
The jobs report shows an economy rising like a phoenix from the contraction generated by Covid 19. The labor market is tight; job shortages are widespread across many industries. The economy has reached maximum employment, one half of the Federal Reserve’s dual mandate. Despite strong job growth and tight labor markets, racial disparity in the labor market remains unchanged with the Black/white unemployment ratio stuck at 2:1.
The “real” unemployment rate, including workers marginally attached to the labor force, edged up to 7.2 percent. There were 1.7 million unemployed – workers without a job for six months or more – amounting to 26.7 percent of the labor force.
Major job gains were concentrated in the leisure and hospitality, professional and business services, health care, and construction sectors, but industry growth was widespread across the economy: 179,000 in leisure and hospitality, 94,000 in professional and business services, 64,000 in health care, and 549,000 total in the services sector
Average hourly earnings showed no growth over the month but grew 5.2 percent over the year. Demand is outstripping supply in many sectors; wages are booming but inputs remain curtailed by supply chain issues. Labor shortages are exacerbated by the secular decline in the labor force participation rate. The impact of Covid 19 helps explain the reduction in the labor force participation rate below the level consistent with the changing age mix of the population. Some employers reduced working hours; others temporarily closed businesses because of labor shortages
The major challenge is elevated inflation. The jobs report offers strong evidence that the economy is fundamentally sound and well on the way toward normalcy following the worst health crisis the U.S. faced in the last century.
The economy grew at an annual rate of 7.0 % in the fourth quarter, 2021; GDP rose 5.6% in all of 2021. Consumption rose 1.5 % in January, but home sales declined 4.5% because of disruptions in construction materials. The cost of construction materials also reduced the number of infrastructure projects initiated under the $1.4 trillion infrastructure act that was passed by Congress last year. Business fixed investment showed small but positive gains though strained by bottlenecks and limited construction materials. State and local government purchases grew little in the fourth quarter and the trade deficit widened as imports rose sharply while exports remained unchanged.
Manufacturing improved in February, but nonmanufacturing orders grew at a slow pace. For example, healthcare payrolls were cut as hospitals reduced hiring in response to lower Omicron virus infections. The increased number of vaccinations reduced hospitalizations.
Inflation, the major challenge facing the economy, broadened in the second half of 2021. The personal consumption expenditure (PCE) index rose 5.7%; core PCE excluding food and energy rose 4.7%. The consumer price index (CPI) rose 7.0 %, a forty year high; core CPI rose 5.5 %. Inflation is largely generated by supply side bottlenecks that upset the balance between supply and demand. Some large firms are also passing increased production cost along to consumers in higher prices. Inflation is heavily concentrated in energy prices which are embedded in households and businesses. The Russian invasion of Ukraine is likely to further raise energy and agricultural commodity prices, especially in Europe. That can create a spillover effect in the U.S. Constraints on energy supplies are worsened by OPEC’s refusal to increase oil and gas production.
The Federal Reserve has taken notice of the broad, persistent rise in inflation. Chairman Jerome Powell announced that the Fed will raise rates at the mid-March FOMC meeting. The Fed will complete Treasury and mortgage-backed security purchases in March, reducing the money supply, further constraining inflation.
Monetary policy tools constrain inflation with a lagged effect. Because the economy is operating at a high level and the Federal Reserve wants to avoid generating a recession, inflation is likely to remain elevated, while declining for most of 2022.
In short, the economic outlook is burdened by uncertainty over the near-term course of Covid 19 and the near-term effectiveness of Federal Reserve efforts to control inflation. The Federal Reserve wants to avoid the policy adopted by former chairman Paul Volcker in 1980 when in response to stagflation, the Fed sharply raised interest rates and generated the worse economic downtown the country experienced since the great depression.