A slip? A snapshot? Or is this the beginning of the end of the economic boom? Even three days after the release of the last US labor market report, economists, politicians and central bankers are still wondering what the numbers are telling them and what conclusions can be drawn from them. “We should have pity on those who have to understand this data,” wrote Mohamed El-Erian, chief economic adviser at insurance company Allianz, in his column for the Bloomberg agency. This applies to analysts, but especially to financial and monetary policy makers.
The fact is that the number of employees in the United States increased by only 235,000 in August compared to the previous month. This is a dramatic drop from June and July, when around one million additional workers were registered each time. So, is the economic recovery that began after overcoming the Corona recession perhaps over again?
If that was really the case, it would be a problem for the government as well as the Fed in many ways. On the one hand, the unemployment benefits that Congress had granted them due to the pandemic were used up in whole or in part on Monday for nearly nine million citizens. Many of these people could find themselves in dire straits if they do not find a new job quickly. On the other hand, given the recent rapid rise in inflation, the Fed had considered announcing the gradual exit from its economic stimulus program this month. This too is now in question.
How the White House views the Labor Market Report as explosive – both factually and politically – has been shown by the fact that President Joe Biden himself spoke immediately after its release. He pointed out, on the one hand, that the US economy created an average of 750,000 jobs per month from June to August. That’s actually a high number, but it hides the recent drastic drop. On the other hand, he dismissed responsibility for the disappointing August data. It was the fault of those who did not get vaccinated, who contaminated themselves and thus slowed down economic development. “We now have an unvaccinated pandemic,” Biden said. “It creates a lot of discomfort in our economy and also at our dining tables.”
Many hospitals are again at the limit of their capacity
In fact, the delta variant of the coronavirus is the main reason the economic recovery has slowed significantly. Over the past week, an average of 153,000 people have been infected each day. Particularly in the south of the country, where most Republican governors have long since lifted almost all restrictions, many hospitals are at the limit of their capacity. The result is that even people who have been vaccinated give up eating out, going to the movies, or taking the plane. The number of table reservations at restaurants, for example, was recently again nearly eleven percent below the summer 2019 level, after the gap had previously been significantly smaller. Hotel occupancy rates in San Francisco, for example, were even 40% lower in mid-August.
The fear of customers of getting infected has led to the fact that restaurants, travel agencies, massage firms or nail salons have recently been reluctant to hire new employees or have even fired employees. Almost 8,000 jobs were lost in August in the taxi and bus sector alone.
At the same time, many companies are still struggling to find employees because either the unemployed do not fit the job profile or applicants turn down jobs such as catering for fear of Corona. The pressure to raise wages therefore continued to grow despite disappointing employment figures. At the same time, the inflation rate is over five percent, as many companies can produce less than desired due to delivery bottlenecks and some also use the situation to make up for lost sales by raising prices. .
Early pundits, including El-Erian, are already warning of “stagflation” in the face of a possible wage-price spiral – a toxic combination of economic slowdown and inflation, in which traditional instruments are ineffective and politicians shudder. Because: the central bank should raise and lower interest rates at the same time, and parliament should at the same time spend more and less money on stimulating the economy. The situation is exacerbated by the fact that the recovery is stalling in countries like Germany and China and new price factors could be added, for example plant closures in the Corona hotspot in South Asia. South East.
The probability of stagflation is low
It’s still a whisper and the likelihood of stagflation in the United States is rather low. The discussion also shows, however, that the economic and price risks are clearly much greater than many critics have recently claimed.
The Fed in particular faces a dilemma. Almost all observers agree that, contrary to all previous expectations, the central bank will not announce in September that previous measures to support the economy will be phased out. Instead, it’s now predicted that the Fed won’t start cutting its asset purchases by $ 120 billion per month until next year, which it uses to keep long-term lending rates low. However, it will be difficult if the price spike were to accelerate at the same time.
And there is another problem that Joseph LaVorgna, chief US economist at French investment bank Natixis, has repeatedly pointed out. He argues that since the start of the pandemic, the Fed has influenced the economy less through the bond market, much less through key interest rates, and more through stock prices: it buys securities and there spends billions, which investors have largely invested in stocks. . Ever-increasing exchange rates mean that even small savers feel richer and consume a lot at least sometimes. This mechanism, according to LaVorgna in the business magazine Barron’s, unfortunately also works in the other direction: if the central bank were to want to abandon its zero interest rate policy at some point due to rising prices, collapse of the stock market and therefore also in consumption is almost inevitable. Concerns about such a development could mean “that the Fed will never be able to return to normal key rates.”