The April jobs report was a surprising disappointment, showing only 216,000 new jobs created instead of the predicted million. There seems to be a conflicting situation in the labor market, as 8 million people are still out of work yet employers report hiring struggles.
The April jobs report was a disappointment to say the least. Analysts expected the economy to create over a million jobs but the report fell well short of expectations, with only 216,000 jobs created.
Was this a temporary blip or a sign of trouble with the ongoing pandemic recovery? Nela Richardson, Chief Economist at ADP, shares her perspective on the employment report and what it means for the future.
Q: What are your thoughts on the April jobs report?
Richardson: "Like everyone, I found it surprising and disappointing. The ADP employment report predicted much stronger growth as we forecasted 742,000 jobs being created, in-line with the street estimate of over a million. We were looking at leisure and hospitality, one of the hardest hit sectors during the pandemic, and believed it was set to really bounce back after improving health conditions.
This did happen but there was an unexpected decline in other sectors that we thought would improve or hold steady. Courier jobs delivering online shopping orders decreased and there was sluggish hiring in construction to name a couple examples.
It just goes to show that there's still work to be done for the jobs recovery. It's not a going to be a straight-line improvement."
Q: What's going on in the labor market?
Richardson: "The labor market is shifting along two distinctly different trajectories. On one hand, we still have 8 million workers sidelined by the pandemic. On the other, restaurant owners, manufacturers and other business owners nationwide report struggling to hire. There are 8 million people without jobs, how can these employers not find workers?
There's something structural going on. The economy may have transitioned and shifted demand away from certain jobs. It could also have to do with the enhanced unemployment benefits. This is good long-term as it means people don't have to accept the very first offer and can pick the job that's right for them. In the short-term, this process could lead to worker supply shortages in certain sectors and industries. Last, there could be a skills mismatch in terms of openings and available workers.
A lot of folks left the market prematurely during the health crisis, such as women and older workers. The puzzle is how do we get these people back in? One positive from the April jobs report was that 400,000 people returned to the job market, which pushed the unemployment rate up. It went up for the right reason though so oddly enough higher unemployment was the good news in this report."
Above: Nela Richardson in MainStreet Macro: Job Switching
Q: What should we expect with economic growth?
Richardson: "The economy has actually been doing well. That's why the employment report caught so many people off-guard. For the first part of the year the economy grew by 6.4% and it's expected to grow by double digits by the end of the year.
There's been strong government support for the economy with trillions in aid. In large part of that aid, consumers are in great shape financially. Solid household balance sheets and high savings rates will likely mean strong summer spending. Since consumers make 70% of the economy this is good news for growth.
Business and residential investment haven't been too bad either thanks to rock bottom interest rates. From a growth perspective, things are going as planned even if jobs market is still recovering. However, the US can't sustain a productive economy if 8 million people are on the sidelines.
Worker productivity is high right now as everyone is forced to do more, but you can't expect a car to keep running if you don't put gas into it. All those hard-hit groups who left the labor market, like service sector jobs, they need to get back in. This is going to be driven by a lot of actors but small businesses will play a key role. Small businesses tend to create the bulk of net new jobs, so they need to be viable and robust to hire again."
Q: Is inflation a concern?
Richardson: "While there's a good consensus that hiring will pick up, what's far more debated is inflation. There's one camp of economists who think that because of government spending and shortages in commodities, there will be inflation issues.
Yes, we're going to see some inflation. The question is how much and how much is healthy? Over the last 20 years, the Fed really had trouble creating inflation and reaching its 2% annual target. Right now, the Fed isn't worried about inflation and is actually encouraging it. That's part of their stimulus strategy.
The Fed is committed to keeping rates low this year for sure. 2022 will likely be more of the same. They may start raising rates in 2023 and 2024. Ultimately, the Fed signaled to the market they are willing to let inflation go above their normal target.
I believe we can expect some inflation, but not enough to overheat the economy. Periods of sustained inflation historically came from commodities and labor. It doesn't look like global oil demand will be enough to trigger a sustained spike in oil prices.
There have also been some pockets of wage increases, like truck drivers given the shortage. Will it be pervasive across the entire labor market? With 8 million workers sidelined, it's unlikely to overheat. We might face some shortages and pockets of price increases, but long-term they will resolve themselves."
Q: What can history tell us about the future drivers of growth?
Richardson: "Macroeconomics tells us that the way to create higher living standards is from innovation and technological progress. It's been the key to growth for decades. When we look at what happened over the pandemic, we can see pockets of innovation such as using technology to work virtually.
These developments might be here to stay and we might see a continued shift to labor saving technologies.
If we're looking to foster growth, it's research and innovation that will get us there. Time will tell if we're investing enough. Robust business investment is a sign of optimism as it shows companies believe sacrificing a dollar today is going to pay off in the future. Current low interest rates are helping spur this investment so this is one reason to be hopeful."
Given today's unprecedented economic conditions, more surprises are likely ahead. For her most up-to-date feedback on what's going on, check out Richardson's Main Street Macro blog.
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