5 things I learned about the economy this week

The Labor Department released a new cracker jobs report on Friday, showing new signs that the economy is recovering after overcoming recession fears.

The U.S. economy added 253,000 jobs, pushing the national unemployment rate down to 3.4% in April, well above economists’ expectations, according to the Labor Department.

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The labor force participation rate has stabilized as black unemployment hits a record low and the number of middle-aged workers in the economy reaches its highest level since before the 2007-08 recession and the financial crisis.

A strong U.S. job market in the wake of the coronavirus pandemic and the Federal Reserve’s rapid interest rate hikes has baffled economists and may reflect deeper structural changes.

“Salaries and household employment are significantly higher.” [the Congressional Budget Office’s] Pre-pandemic projections are especially surprising given that the population is lower than expected due to premature deaths and missing immigrants,” said former President Obama, who chaired the White House Committee of Economic Advisers (CEA). Jason Furman wrote online Friday. .

Still, disruptions in the banking sector could push the economy closer to the much-feared recession.

Here are five things we learned about the US economy this week.

Inflation is declining rapidly even as the job market remains hot

Inflation has been declining since the middle of last year, along with the consumer price index (CPI), dropping from 9.1% annualized in June to 5% in March.

That’s still above the Fed’s 2% target rate, but prices are falling without rising unemployment, putting many economists in a loop.

Wages were also slightly higher than levels consistent with 2% inflation, but not significantly, according to Friday’s employment report.

“Over the past three months, average hourly wages have increased at an annualized rate of 4.2%, just a few tenths of a percentage point higher than the peak in 2019 when inflation was 2%,” said the left-wing research nonprofit Economics. Dean Baker, an economist at the Policy Research Center, told The Hill.

Most economists agree that current inflation is largely caused by companies keeping prices high just because they can.

Fed Chairman Powell on Wednesday expressed confidence that an end to supply chain disruptions, which has been a major factor in previous inflation spikes, would also help lower prices.

“As the product pipeline returns to normal, long wait times and stockouts will disappear, inflation will fall and corporate profit margins will fall,” Powell said Wednesday.

Low-income earners are getting better wages compared to inflation

Workers in the lower income brackets, who tend to work in service industries, are still getting higher wages than workers in other strata.

While inflation has outpaced wage growth in the recovery from the pandemic for the U.S. workforce as a whole, the situation is reversed for low-income workers, pushing up real wages in a phenomenon known as “compression.” .

“Wage growth continues to trend slightly faster for low-wage workers. Overall average hourly wages across production and unsupervised workers, both leisure and hospitality sectors, have averaged 4.7 per annum since January. %,” Baker wrote online Friday.

The unemployment rate for black Americans hit a record low of 4.7% in April, after breaking a record in March, but the unfair treatment of black Americans in the workforce remains a serious problem.

Good news for workers, bad news for the Fed

The Fed on Wednesday decided to raise rates for the 10th time since March last year, raising the benchmark rate range to 5-5.25%.

In March, the Fed expected interest rates to end the year near that level, but central bank officials may continue to raise rates if the labor market becomes more resilient.

Friday’s strong employment levels could be a reason for the Fed to raise interest rates further, further slowing the US economy in response to inflation.

The Fed’s March economic forecast puts the unemployment rate at 4.5% this year, more than a percentage point above Friday’s unemployment rate. If unemployment hits the Fed’s projections, the economy as a whole will lose more than 1.8 million jobs.

“In my view, avoiding a recession is more likely than going into one,” Powell said Wednesday, as Fed staff predicted a recession, in his view on the economic outlook. said.

“But I wouldn’t rule it out either. A mild recession like I’d like is possible.”

Bank failures and bailouts make recession more likely

Although the economy as a whole remains strong, a spate of bank failures and bailouts that began in March and lasted through May could increase the likelihood of a recession.

The U.S. economy grew at an annual pace of 1.1% in the first quarter, but has slowed markedly since 2022, according to Commerce Department data. Experts fear the economy could slow further as banks tighten lending and clamp down.

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Tighter lending standards would have about the same effect on the economy as higher interest rates, both of which would slow business activity.

The American Bankers Association (ABA) credit index fell to its lowest level since the outbreak of the pandemic in April.

In an April release, the ABA said: “The figures show widespread expectations among bank economists that credit market conditions will weaken over the next six months, and banks may become more cautious about extending credit. high,” he said.

ABA bankers said they expect consumer and business credit conditions to deteriorate over the next six months as concerns about local banks persist.

Despite persistent concerns, regional bank shares rose sharply in Friday trading. Pacwest Bank was up 70%, while Western Alliance and Zions Bancorp both posted double-digit gains. The S&P Rural Bank Index was still down more than 10% for the week as of noon on Friday.

The White House said Thursday it was monitoring short-selling activity related to the regional banking sector. Wall Street short sellers bet on stocks rather than endorse them.

How and where Americans work is changing

A strong post-pandemic U.S. job market has been characterized by high levels of employment and low wage growth. There is significant turnover in the job market, and many workers have been able to leave their old jobs for new ones.

“As has been the case in recent months, job growth remains concentrated in a few sectors, notably health care and hospitality. Job growth in the sector continues to offset losses in other industries, including technology and the mortgage market,” said Mike Fratantoni, an economist at the Home Loan Bankers Association, in an analysis.

This was reflected in Friday’s diffusion index (a measure of how many industries are adding jobs), which showed job growth in targeted sectors such as warehousing and hospitality rather than the economy as a whole. shown.

“The employment spread index … was near its post-pandemic low of 57% in April. ,” EY-Parthenon economist Lydia Boussall said in an analysis on Friday.

While U.S. workers are adopting new behaviors related to short-term contracts and remote work, these changes are being accelerated by other factors in the economy. Commercial real estate is now a square target for private equity and other large investors. They want to scrap some of their aging office space to make room for more white-collar workers working from home.