Reviews | September jobs report does not suggest an economic freefall

Do you want the good news or the bad news? Let’s start with the good news – the labor market statistics that Democrats are likely to brag about as we near the midpoints.

There was a lot to like about the September jobs report released on Friday, the penultimate job outlook ahead of Election Day. Despite the widespread perception that we are already in a recession, many jobs (263,000) have been added once again, continuing the 21-month streak of roughly gangbuster hiring. The pace of job growth has slowed – it had averaged 382,000 a month over the previous three months – but is still quite strong.

Not what you would expect if the economy was already in free fall.

In addition, some of the sectors most in need of hiring have seen big gains. Food services and drinking places, for example, added 60,000 jobs in September; it’s one of the industries hardest hit by the pandemic and is still over half a million positions short of its pre-covid peak. Health care, which desperately needs more workers, also continued its wave of hiring.

Now consider the less good news, starting with the unemployment rate.

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The unemployment rate has fallen to 3.5%, corresponding to the low level reached just before the pandemic, in February 2020. Sounds pretty good, right? Except that it has fallen partly for the “wrong” reason: the labor force has shrunk by 57,000, and people outside the labor force are not counted in official unemployment calculations.

The economy needs the workforce to grow, not shrink, if we are to tame labor shortages (and inflationary pressures).

In general, there has been a sharp decline in the share of Americans in the labor force. This is partly due to demographics (baby boomers are retiring) and partly to changes among Americans in prime age (those aged 25 to 54).

It also doesn’t help that we’re still running out of 1.7 million immigrants of working age, compared to the numbers we would expect to see if pre-2020 trends had continued.

Additionally, not all industries that need to hire have been able to do so.

State and local governments, for example, cut 27,000 jobs in September. This is a worrying development: As I wrote about last month, state and local governments are still understaffed compared to pre-pandemic levels. The private sector has recovered all jobs lost, on a net basis, since February 2020, while municipal governments are still far behind.

It’s not because they’re broke or actively trying to downsize the public sector – in fact, many governments have tons of vacancies and are eager to hire, because right now the basic public services such as garbage collection are struggling. But in today’s job market, the government cannot compete with the private sector on salaries. Additionally, many government jobs have recently become more stressful or unpleasant. And rather than raise wages enough to attract more workers, many governments are returning money to taxpayers.

Speaking of wages: average hourly wages in the private sector have increased by 5% over the past 12 months. Which is not nothing, exactly, but certainly much less than the rise in prices over the same period. We will know for sure when we have the inflation figures for September next week. (Year-over-year price growth in August was over 8%.)

Price growth has outpaced inflation for more than a year, a source of pain for consumers and fodder for Republican political messages. While there have been some welcome signs recently that inflation may be easing – particularly when gas prices have fallen and asking rents appear to be falling – it is not clear that we should count on continuation of this trend. A cartel of oil-producing countries has just announced major production cuts, for example. This will drive up gasoline prices.

Meanwhile, the Federal Reserve continued to raise interest rates sharply in an effort to dampen demand and hence price growth. The flip side of this risk, of course, is that it could accidentally raise rates to the point of tipping the economy into recession.

So, for now, it seems unlikely that we are in a recession. Tomorrow, or next year, is a whole different story.

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