For months, Republicans have been hammering
President Joe Biden’s
economic policies, placing blame for record-high consumer prices directly on his shoulders.
But as he faced them directly during his latest
State of the Union
address before Congress, Biden didn’t shy away from talking about the
economy
or inflation — in fact, he listed them among his accomplishments at the top of his 73-minute speech.
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“Two years ago, the economy was reeling,” Biden said. “I stand here tonight, after we’ve created, with the help of many people in this room, 12 million new jobs, more jobs created in two years than any president has ever created in four years, because of you all, because of the American people.”
“We’re not finished yet by any stretch of the imagination. But [the] unemployment rate is at 3.4%, a 50-year low,” the president said to loud applause. “Near-record [low] unemployment for black and Hispanic workers.”
As for inflation, “gas prices are down $1.50 from their peak,” Biden said. “Food inflation is coming down — not fast enough but coming down. Inflation has fallen every month for the last six months, while take-home pay has gone up.”
Biden’s confident remarks came on the heels of two government reports. One showed that the
inflation continues to relent
, and more recently, a blockbuster U.S. employment report showed that
jobs grew by 517,000 last month
, blowing up experts’ predictions and shocking Wall Street.
With the Federal Reserve continuing its aggressive campaign to bring down prices by hiking interest rates, economists had
estimated
that the Labor Department’s jobs report for January would come in at around 185,000 new positions.
“It’s very strong,” Fed Chairman Jerome Powell said of the report. “It’s certainly stronger than anyone I know expected,” he added, calling it a “good thing” that inflation has started to weaken without major job losses.
But employment is a key data point that Powell and the Fed have been monitoring as they chart their path forward on inflation, with Powell
arguing
in the fall that supply and demand in the labor market were in need of further “rebalancing” to get prices under control. With the latest data showing that the job market remains resilient, it’s now unclear whether the Fed will halt its rate increases after its next meeting, as previously expected, or instead adopt even stricter monetary policy, further increasing the risk of layoffs and a recession.
“We never say, ‘This is what we think will happen,’” Powell
told
the Economic Club of Washington on Feb. 8. “We make a tentative forecast, and then we let the data come in. For example, if the data were to continue to come in stronger than we expect and we were to conclude that we needed to raise rates more than is priced into the markets or than we wrote down at our last group of forecasts in December, then we would certainly do that. We would certainly raise rates more.”
In a late November
speech
at the Brookings Institution, Powell set out the “economic conditions” that he and the U.S. central bank “need to see to bring inflation down to 2%.” Among those conditions was the labor market, which Powell said “is especially important for inflation in core services [excluding] housing.” At the time, it had shown “only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation over time,” he said.
“Despite some promising developments, we have a long way to go in restoring price stability,” Powell added.
The Fed began raising interest rates early last year, approving several hikes of 75 basis points to try to cool an overheated economy marked by record-high gas, food, and real estate prices. By making debt more expensive, the Fed hoped to rein in consumer spending, thus limiting demand and bringing down prices.
But as the latest consumer price index reports from the Bureau of Labor Statistics show, inflation has started to relent meaningfully in recent months, allowing the Fed to approve smaller rate increases — and fueling predictions that it would stop the hikes after a final 25-point increase in March. Economic growth has also started to slow, marking the beginning of a cooldown.
Then came the Feb. 3 employment report, which blew predictions out of the water.
“If job growth is indeed as strong as the latest data suggests, then it presents a puzzle in light of other data showing a slowdown in economic activity, as well as widespread expectations of slow growth and perhaps even a recession, in 2023,” said Preston Caldwell, chief economist at Morningstar.
“Today’s report should incrementally push the Fed to a tighter monetary policy stance,” Caldwell said, according to a
Morningstar market update
.
Some progressive Democrats have disagreed with Powell’s determination to forge ahead on inflation despite the risks to jobs and the potential for a recession. The day Powell spoke before the Economic Club of Washington, Sen. Elizabeth Warren (D-MA) noted the new employment figures in her latest criticism of the Fed chairman.
“Under President Biden, the economy added more than 12 million jobs and unemployment is at the lowest level since 1969,”
she tweeted
. “Fed Chair Powell risks throwing millions of Americans out of work with extreme rate increases. With inflation slowing, the Fed should pause its rate hikes.”
There appear to be several factors contributing to the strong labor market. “Caldwell says that either jobs growth is being overestimated, economic growth is being underestimated, businesses are hiring aggressively into an imminent economic slowdown, or a mix of all three,” per the Morningstar market update.
“And if businesses really are hiring aggressively ahead of an economic slowdown, then business profits are about to take a nosedive, which will likely lead eventually to reduced hiring and layoffs,” Caldwell said, according to the report.
Powell has his own theories. “The labor market is strong because the economy is strong, and as I mentioned, it’s a good thing that we’ve been able to see the beginnings of disinflation without seeing the labor market weaken,” he said Wednesday when asked why unemployment has remained so low.
“It’s just that there’s a lot of demand for workers,” he said. “In fact, if you look at the supply of workers versus demand for workers, demand for U.S. workers is now more than 5 million greater than the available supply, and the available supply consists of people who are either working or actively looking for a job.”
Powell said that “was not the case” before the coronavirus pandemic hit in early 2020. “The pandemic really had a significant, lasting mark so far on labor supply in the United States,” he said. “The labor force participation rate came down, and there now is a shortage of workers — and it almost feels more structural than cyclical, so that’s a significant issue.”
As the Bureau of Labor Statistics
noted
, the labor market “was severely affected” by the pandemic “as the unemployment rate increased to 14.7% in April 2020 from 3.6% in April 2019.”
As the year went on, “the labor market began to improve and the unemployment rate started to fall. The labor force participation rate, however, did not recover as fast,” according to BLS. “This low participation rate during COVID-19 has been attributed to several factors, such as dependent care demands, increased unemployment benefits, or people afraid of getting sick from the COVID virus.”
The pandemic also prompted intense public discourse around working conditions, wages, and work-life balance as people experienced burnout and reevaluated their relationship with work — leading in part to a
record-high number of job quits
.
“There’s an organizational psychology theory called terror management, which posits that when individuals are near life-or-death situations or reflect on death or illness, they tend to think existential thoughts,” Anthony Klotz, a business professor at Texas A&M University who coined the term “Great Resignation” to describe the changing labor market,
told
Barron’s
in late 2021. “It struck me that probably the entire world at the same time was reflecting a little bit on their lives because of the deaths and illness the pandemic caused.”
In his November speech, Powell said some people have not returned to work “because they are sick with COVID-19 or continue to suffer lingering symptoms from previous COVID infections,” also known as long COVID.
“But recent research by Fed economists finds that the participation gap is now mostly due to excess retirements — that is, retirements in excess of what would have been expected from population aging alone,” Powell said. “These excess retirements might now account for more than 2 million of the 3.5 million shortfall in the labor force.”
Powell said health concerns “have surely played a role as COVID has posed a particularly large threat to the lives and health of the elderly,” while some workers may have been able to take early retirement thanks to “gains in the stock market and rising house prices in the first two years of the pandemic” that bolstered their coffers.
“The second factor contributing to the labor supply shortfall is slower growth in the working-age population,” Powell said. “The combination of a plunge in net immigration and a surge in deaths during the pandemic probably accounts for about 1.5 million missing workers.”
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In any case, the newest job numbers underline the fact that the process of beating back inflation is “probably going to be bumpy.”
“We didn’t expect it to be this strong,” Powell said of the report. “But I would say it kind of shows you why we think that this will be a process that takes a significant period of time.”
