What should we infer from the low unemployment rate?
Last week, the Labor Department reported that the economy added 372,000 jobs in June. The jobs-added number was in line with the average gain over the past two months — 368,000 in April and 384,000 in May. The unemployment rate remained at 3.6.
The private sector has now returned to its pre-pandemic employment level. The public sector is 664,000 jobs below what it was in February 2020. Other than the public sector, no industry lost jobs in June on a seasonally adjusted basis.
The labor force participation numbers are less encouraging. The percentage of Americans who are employed or actively seeking employment dipped to 62.2 percent. That’s more than one percentage point below the pre-pandemic level. In addition, the household survey, one of two surveys the DOL uses to get a sense of the employment picture, has been uneven. (The survey of firms continues to paint a bright picture.)
We shouldn’t be surprised to see high inflation accompanied by a low unemployment rate. The two have often gone together. However, in the years since the heyday of the Phillips Curve, they haven’t always.
I think we can infer from the low unemployment rate that the current inflation is mainly the result of high demand, rather than supply problems — bad policies rather than bad luck. As Christopher Waller, the economist appointed by Donald Trump to the Federal Reserve Board of Governors, said in a recent CSPAN interview, if supply problems were the major driver of the current inflation, we should see this reflected in rising unemployment.
Waller also pointed to a recent study (he didn’t say by whom) that attributes about two-thirds of the current inflation to the demand side. And there is this testimony by Veronique de Rugy before the Senate Committee on Banking, Housing, and Urban Affairs.
The spike in demand, in turn, should be attributed to government policies designed to stimulate the economy during the pandemic (or, as Richard Vigilante puts it, “to compensate people for destroying their jobs and businesses”). Richard writes:
Starting in early 2000 Congress and the President(s) spread many trillions across the land. The Fed, as usual, monetized the resulting debt though the system, popping the money supply.
At first, Americans tended to save their covid money. Inflation remained low.
But late last year, spending took off. So has inflation. And the unemployment rate has declined.
The Fed will infer from the low unemployment rate that it can fight inflation by raising interest rates without throwing the economy into a recession. This was the view of Waller during the CSPAN interview.
Is that view correct? Perhaps.
However, I think it’s worth noting that although the employment picture is good (at least by some key measurements), economic growth has “gone wobbly.” Gross domestic product actually contracted in the first quarter of 2022 and many economists expect it to contract in the second quarter, as well.
Undeterred, the Fed will continue to raise interest rates. Maybe it will all work out. Let’s hope so.