It’s August, Joe Biden is going for the casual look, and the latest jobs report hit all the right notes. I spoke with senior writer Eric Levitz about what appears to be a piece of unambiguously good news, the state of inflation and labor shortages, and to what extent the pandemic still threatens the economy.
Ben: Friday’s jobs report was encouraging in almost every sense of the word. There were strong hiring numbers in most industries, for a total of 943,000 jobs added in July. The unemployment rate ticked down significantly, to 5.4 percent. (Still more than a point higher than pre-pandemic.) It’s never smart to make too much out of one month’s data, but this comes amid generally strong economic indicators elsewhere. What is your first-blush impression of this report and how it fits in with the overall economic picture in America?
Eric: My first impression is that the recovery is much stronger than we realized (or at least, was much stronger before Delta really took off.) The report didn’t just show that the economy added more jobs in July than had been expected; it also revised June’s number upward. As the Times’ Neil Irwin notes, yesterday, the consensus estimate of the average monthly job gain across May, June, and July was 567,000. That number is now 832,000.
What’s more, the drop in the unemployment rate is especially impressive because the pool of job-seekers also expanded. The headline unemployment rate tells us the percentage of Americans who are actively looking for work but can’t find any. For that reason, when a lot of Americans who were formerly not seeking employment (whether out of discouragement at their job prospects, or because of pandemic-related child-care responsibilities, etc.) start looking for jobs, the unemployment rate will often rise. But in July, employment opportunities were so abundant, we saw both one of the largest monthly increases in labor-force participation in decades and a decline in the unemployment rate.
Ben: Two side effects of this unusual kind of economic recovery have been inflation: Many goods and services are costing more than Americans are used to; and, from an employer perspective, labor shortages make it difficult to fill all the job openings that do exist, for a multitude of reasons. Do you see any sign that either of these problems (if you want to call them that) are lessening?
Eric: The size of these job gains combined with the increase in labor-force participation both indicate that the supposed crisis of enhanced federal unemployment benefits slowing the recovery by luring the jobless into idleness was, at the very least, overstated by frustrated employers and their political allies. Regardless, those benefits will be expiring soon. There may be other significant sources of hiring difficulty; there are many anecdotal reports of service-industry workers going back to school or switching careers, after the pandemic exposed them to their employers’ callous disregard for their well-being and/or gave them time to reassess what they wanted out of their working lives. In general, I think that a post-pandemic recovery is likely to see a lot of adjustment costs. The economy of February 2020 isn’t coming back. Providing services to white-collar workers in office buildings is unlikely to be as lucrative as it was in the era when Zoom wasn’t ubiquitous. But many other industries will be much larger than they were pre-pandemic. And we’re also seeing significant productivity increases, as employers were forced to find efficiencies during last year’s adverse conditions. So there are headwinds to the recovery as a result of its unusual origin. But there are tailwinds as well.
As for inflation: The report shows a 0.4 percent monthly wage gain. On one level, that mitigates things: From the perspective of the median worker, so long as wages are keeping pace with rising prices, inflation isn’t much of a problem. On the other hand, it is possible that rising wages could result in rising prices. But I think it’s important to be clear about what we mean when we say “inflation.” Inflation, in the modern context, is just an average of price movements across a diverse (and somewhat arbitrarily selected) basket of goods and services. For all the talk of high inflation, we are not actually seeing across-the-board price increases — a phenomenon that would indicate we have a demand-driven problem, with there simply being too much spending power relative to the supply of available goods and services. Rather, we are seeing an extraordinary rise in the price of cars, and more modest ones in the prices of gas, airfare, hotels, and restaurant food. Those last three items are driven by a rebound from the pandemic. The car-price problem derives from the global semiconductor shortage. And oil and gas prices are always volatile. My point in emphasizing such details is this: The go-to policy response to inflation is for the Fed to raise interest rates to reduce demand and cool off the economy. Which makes some sense if you think about inflation as an economywide phenomenon. But when you look at what’s actually happening — large price increases concentrated in a few sectors — it just doesn’t. If cars are getting more expensive because there aren’t enough semiconductors, how will raising interest rates — and thus, making it more expensive for semiconductor manufacturers to expand production by borrowing money — going to make that situation better?
Ben: The virus picture in the U.S. is worsening, with about 100,000 cases reported yesterday, as opposed to about 10,000 per day a month ago. This is, of course, a different kind of wave than previous ones, since much of the population is vaccinated. Still, more and more cities and states are announcing various restrictions and limitations, and those who are cautious about the virus are newly wary about fully going back to “normal.” In the early stages of this pandemic, the country’s economic outlook was very much tied to how well it was controlling COVID, but this may be less true than before. To what extent do you think the summer surge is a threat to what seems to be a pretty steady recovery?
Eric: I think it’s definitely a threat. Less of a threat than previous spikes were for the reasons you suggest. Those who take COVID seriously are largely vaccinated. Those who aren’t vaccinated largely do not take COVID seriously, in the sense of adjusting their economic behavior to limit their risk of infection. Together, those factors seem to have prevented the virus from inhibiting the recovery much at all last month. With reports of breakthrough cases among the vaccinated from the Delta variant — and now, changes in some major cities’ policies — the dynamic could change. How much it will change is difficult to anticipate. But without question, the ongoing spread of a highly contagious, unusually deadly virus is the strongest headwind facing the recovery.