A slip up? A snapshot? Or is it the beginning of the end of the economic boom? Even three days after the latest US labor market report was published, economists, politicians and central bankers are still puzzling over what the numbers are telling them and what conclusions can be drawn from them. “We should feel sorry for those who have to figure this data out,” wrote Mohamed El-Erian, chief economic advisor at the insurance company Allianz, in his column for the Bloomberg agency. This applies to analysts, but above all to the responsible financial and monetary politicians.
The fact is: the number of employees in the USA rose by just 235,000 in August compared to the previous month. This is a dramatic decrease compared to June and July, when around one million additional workers were registered in each case. So is the economic upswing that started after the Corona recession was overcome already over?
If that were actually the case, it would be a problem for the government as well as for the Fed in many ways. On the one hand, unemployment benefits that Congress had granted them due to the pandemic ran out in whole or in part on this Monday for almost nine million citizens. Quite a few of these people could find themselves in dire straits if they don’t find a new job soon. On the other hand, with a view to the recent rapid rise in inflation, the Fed had considered announcing the gradual exit from its economic stimulus program this month. That too is now in question again.
How explosive the White House considers the labor market report – both factually and politically – was shown by the fact that President Joe Biden himself spoke up immediately after it was published. 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 is actually a high number, but it hides the recent drastic slump. On the other hand, he pushed away responsibility for the disappointing August data. It was the fault of those who did not get vaccinated, who became infected and thus slowed down economic development. “We now have a pandemic of the unvaccinated,” said Biden. “That 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 that the economic recovery has stalled significantly. In the past week, an average of 153,000 people became infected every day. Especially in the south of the country, where mostly Republican governors have long since lifted almost all restrictions, many hospitals are at the limit of their capacity. The result is that even vaccinated people give up eating out, going to the movies or getting on planes again. The number of table reservations in restaurants, for example, was recently again almost eleven percent below the level of summer 2019, after the gap had previously been significantly smaller. The hotel occupancy rate in San Francisco, for example, was even 40 percent lower in mid-August.
Customers’ fear of being infected has led to the fact that restaurants, travel agencies, massage practices 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 business alone.
At the same time, many companies still have problems finding employees because either the unemployed do not meet the job profile or applicants reject jobs such as those in gastronomy for fear of Corona. The pressure to raise wages has therefore continued to grow despite disappointing employment figures. At the same time, the inflation rate is more than five percent, because many companies can produce less than desired due to delivery bottlenecks and some also use the situation to make up for lost sales by increasing prices.
The first experts, including El-Erian, are already warning of “stagflation” in the face of a possible wage-price spiral – a toxic combination of economic downturn and inflation, in which classic instruments do not work and make politicians shudder. Because: The central bank would have to raise and lower interest rates at the same time, and Parliament would have to put more and less money into stimulating the economy at the same time. The situation is exacerbated by the fact that the upswing is stalling in countries such as Germany and China and that new price drivers could emerge, such as plant closings in the Corona hotspot of Southeast Asia.
The likelihood of stagflation is low
It is still just whispering, and the likelihood of stagflation in the US is rather low. The discussion also shows, however, that the economic and price risks are clearly much greater than many detractors recently claimed.
The Fed in particular faces a dilemma. Almost all observers agree that, contrary to all previous expectations, there will be no announcement by the central bank this September that the previous measures to support the economy will be phased out. Instead, it is now expected that the Fed will not begin to cut back on its $ 120 billion per month asset purchases until next year, which it uses to keep long-term lending rates low. It will be difficult, however, if the price surge should pick up at the same time.
And there is one more problem that Joseph LaVorgna, US chief economist at the French investment bank Natixis, pointed out several times. He argues that since the beginning of the pandemic, the Fed has influenced the economy less through the bond market, let alone through key interest rates, and more through share prices: it buys securities and spends billions on them, which investors largely invested in shares. The steadily rising exchange rates mean that even small savers feel richer and consume heavily at least at times. This mechanism, according to LaVorgna in the business magazine Barron’s, unfortunately it also works the other way around: Should the central bank ever want to abandon its zero interest rate policy due to rising prices, a slump in the stock market and thus also in consumption is almost inevitable. Concerns about such a development could mean “that the Fed will never be able to return to normal policy rates”.