ON AUGUST JOBS REPORT
The US economy continues to grow at a steady pace. After a larger-than-expected gain in employment in July, the labor market has settled back into the pattern of slow-but-steady growth from earlier in the year. The Bureau of Labor Statistics reported this morning that the US added 315,000 jobs in August, with the unemployment rate increasing to 3.7%, up slightly from its post-pandemic low last month. The uptick in unemployment was driven by an increase in labor force participation up to 62.4%, matching its recent high in March, but still one percentage point below pre-pandemic levels. Earlier this week the BLS separately reported that job openings increased in August, and for the past year or more have remained at historically high levels. While the recent GDP reports have shown that economic growth has slowed sharply, the labor market expansion continues at a healthy pace.
Driving the developments in the labor market and the broader economy is the inflation situation and the recent policy changes by the Federal Reserve. After a long delay, the Fed finally pivoted to tighter monetary policy earlier this year. But by that point that Fed had lost some of its hard-earned credibility when it had kept reiterating (or hoping) that inflation was transitory and would recede on its own. Markets rallied in early August on hopes that the tightening cycle had ended and before long the Fed would cut rates again. In his speech at Jackson Hole, Powell made clear that the Federal Reserve will do “whatever it takes” to rein in the inflation problem in the US and that such a policy pivot is not likely anytime soon.
However, while Chair Powell has reiterated that bringing down inflation will require economic pain and an increase in unemployment, that need not be the case. While raising interest rates and tightening credit will undoubtedly hurt some sectors, such as the housing market, appropriate and credible policy need not cause a broad slowdown or recession. Past examples of successful disinflations without economic hardship were built on credible monetary policy accompanied by stable fiscal policy. Recent labor market outcomes and the signs of slowing price gains suggest that such an outcome is possible in the US, but it will require continued effort by the Fed and fiscal sanity in Washington. After many missteps and a long delay, the Fed has returned to the right path. But the Biden administration and Congress continue to pursue fiscal expansion.
—Noah Williams, Manhattan Institute Adjunct Fellow and Professor of Economics at the University of Miami.
Williams is an economist who has published widely and co-authored several papers with Nobel Prize recipients Lars Peter Hansen and Thomas Sargent. For a list of previous writing at the Manhattan Institute, click here. For his academic work and macroeconomic research, click here.
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