“We’re not going back to the same economy as we had in February of 2020,” Jerome Powell said, responding to a question from Nick Timiraos during December’s post-FOMC meeting press conference.
Powell meandered his way into a discussion about the labor force participation rate, and specifically how disappointed he was when the expiration of supplemental unemployment benefits, a return to in-person learning and vaccinations didn’t compel more workers to immediately move off the sidelines.
Then, he suggested the Fed won’t wait around in the face of elevated inflation. “We don’t have a strong [recovery in the] labor force participation rate yet and we may not have it for some time,” Powell told Timiraos. “We have to make policy now,” he continued, somewhat emphatically. “Inflation is well above target.”
The Fed, it would appear, has accepted that some of the shortfall versus pre-pandemic levels isn’t going to be recovered — it’s structural. As such, it makes no sense to cite it as an excuse for staying behind the curve when inflation is running the hottest in four decades.
For months, though, they did just that — cited it as an excuse for foot-dragging. But according to Powell’s dramatic retelling of his own internal deliberations, the Fed’s implicit pledge to close every last employment gap (check every single labor market box) before tightening policy, inflation be damned, became an untenable position in his mind sometime shortly after the September FOMC.
I bring this up because the December jobs report looms large as the first major macro event of the new year. Economists expect a rebound from November’s underwhelming headline print, but overall, market participants would like to see a less ambiguous set of numbers. The participation rate did move higher in November and the unemployment rate dropped sharply. An encore combined with a beat on the headline would be good news, unless of course you’re concerned about the Fed getting too aggressive on the way to tightening the economy into a slowdown and/or risk assets into a tailspin. Remember: They always break something, somewhere.
“The Chair’s acknowledgment that a lower participation rate could persist into the next stage of the cycle speaks to the shifts in employment and working trends that have emerged during the pandemic,” BMO’s Ian Lyngen and Ben Jeffery said, noting that “the one apparent shift has been that fewer workers are anticipated to return to the labor force, at least not for the foreseeable future.”
As you ponder this ahead of December payrolls, it’s worth noting that Goldman sees the unemployment rate dropping to 3.9% by February. That would be the final jobs report before the March FOMC meeting, when the bank expects the Fed to hike following the end of a truncated taper (figure below).
By the time balance sheet rundown begins, Goldman sees the unemployment rate falling to 3.5%, the half-century low hit prior to the pandemic.
However, the bank reiterated last week that although the participation rate “should rise as COVID risks decline and workers exhaust their financial cushions from the pandemic,” it isn’t likely to return to the pre-pandemic demographic trend by the end of the year (figure on the left, below).
“Most of the early retirees and some of the younger and middle-aged workers” will remain sidelined, Goldman reckoned, on the way to recapping the main points from a longer piece on the subject.
“With job opportunities now plentiful, we think any remaining decline that persists next year can be fairly characterized as voluntary or structural and therefore not really a shortfall from the Fed’s maximum employment goal,” David Mericle and Alec Phillips wrote.
This is a topic (and it’s hardly the only one) that presents folks like myself with a somewhat vexing quandary — it doesn’t make for the most compelling reading, but it’s one of the most important economic issues of the post-pandemic era.
At the least, the above will be worth re-reading as the recovery unfolds and as some of the reasons cited by the unemployed for not urgently seeking work (figure on the right, above) become less relevant.
In the same note cited above, BMO’s Lyngen and Jeffery briefly mentioned another shift brought about by the pandemic. “Another development… which has given us pause as it relates to the potential for more durable changes for the US worker has been increased efforts toward unionization,” they wrote, adding that although “a significant return of collective bargaining power is by no means our base case, it’s an interesting thought exercise.”
Yes, it surely is. In fact, I’d argue that when we look back on the pandemic, perhaps the most important economic consequence (outside of inflation) will be the abrupt resurrection of labor as an economic actor with some measure of clout.
But don’t get too excited. As Lyngen and Jeffery went on to say, “the obvious offset is the rise of automation in the service sector that has only accelerated during the pandemic and will eventually serve to undermine the ability to secure inflation-linked wage gains.”
The statistics that I found when I looked a few weeks ago (I think it was BLS) suggested that the decline in labor participation from pre-pandemic levels was similar for men and women. I had suspected that it would be greater for women than for men. Regardless, I think many two-income families with kids were forced to do a real-world experiment on what would happen if one spouse stopped working outside of the house and stayed home with the kids–at the same time not having to pay for childcare outside of the house and other costs associated with employment outside of the house. You hear anecdotally that having both spouses work outside the home when there are small children is kind of a zero-sum game financially. And often the justification is that you do it to keep career continuity, because taking 3-5 or more years out of the workforce would have permanent, damaging effects on career trajectory. Covid–with school closures, layoffs, the possibilities for permanent remote work, etc–has probably changed the calculus for many. I suspect this is a factor in the restructuring of the US labor force that we are witnessing.
Another thought: I wonder how many new “retail investors” in their first 1-2 years of investing now fancy themselves as independent, professional investors? It’s easy to think you don’t need a day job in a year of spectacular asset gains, but not so easy in a down year.
Rules-based immigration, with a path to citizenship, would be a positive on so many levels for the US.
We have plenty of room.
Oh the irony of that statement against the backdrop of the entire Trump presidency. Although Canada’s immigration policy does support your thesis.
I was at the less than half-masked grocery store down the street yesterday that was probably over capacity because, masks are worse than Covid I hear. In the midst of the over capacity with customers store were a large volume of Gen Zer’s stocking shelves and fulfilling online orders. Several sections of the store were in fact completely blocked by these “workers” chit chatting in the aisles. I thought to myself, as a former retail worker, I would have been fired on the spot if this were me. So I recognize that any labor is good labor these days for crap jobs like that but, I also have to weigh that none of this really is good for business. These types of employees are probably deterring customers and reducing sales while simultaneously causing delays in the shopping process exacerbating the over capacity problem for the store. And surely all of these people are going to end up with Covid since Omicron doesn’t care about vaccination status and hundreds of people in close quarters not wearing masks are surely spreading it to each other. So bring on the automation; automatically order and stock shelves, make every register a self checkout station, and have all shopping carts self drive back to the queue. The lessons of crap jobs at a young age are gone now, so too should be the crap jobs.