Economist Noah Williams Comments on the July Jobs Report
If the U.S. economy is in a recession, it is one unlike any we’ve ever seen. While economic growth has slowed, with real gross domestic product declining at a 1.3 percent annual rate over the first half of 2022, the labor market expansion continues. The Bureau of Labor Statistics (BLS) reported this morning that the U.S. added 548,000 jobs in July, with the unemployment rate dipping to 3.5 percent for a new post-pandemic low. The jobs gain was a slight acceleration over the past few months, with most of the gains coming in the service sector. Earlier this week the BLS separately reported that job openings fell just slightly but remain at historically high levels. All of this suggests that the labor market remains very tight and is experiencing healthy growth.
Business cycles are typically characterized by labor market fluctuations, with recessions largely characterized by declines in employment and increases in the unemployment rate. By contrast, the growth slowdown we’ve seen so far in 2022 has been driven by a pullback in business investment, particularly companies running down inventories, and a fall in real incomes and spending as inflation has hit 40-year highs. But these developments have yet to spill over to the hiring side of the labor market. Over the past year many businesses have struggled to hire workers, with many employers complaining of labor shortages. This pent-up demand for labor has yet to be satisfied. The decline in output with continued employment growth implies directly that labor productivity (output per worker) has fallen. While atypical of an expansion, decreasing productivity goes along with the declines in real incomes observed recently, with wages increasing slower than inflation.
All in all, the jobs report today should keep the Federal Reserve on a path to continue raising interest rates into the fall. In the best case scenario, inflation will slow with slowing growth, and the labor market adjustment will come through wages and a decline in job openings rather than employment. While many risks remain, this week’s data suggest that narrow path remains open.
—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 his previous writing at the Manhattan Institute, click here. For a list of his academic work and macroeconomic research, click here.
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