(What’s Left of) Our Economy: The Worst of All Possible Inflation Worlds for U.S. Workers?

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ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, labor productivity, PCE, personal consumption expenditures index, productivity, recession, stagflation, wages, workers, {What's Left of) Our Economy

The newest report on a key official measure of worker compensation has just shown that, during today’s high inflation era, American workers could be both significantly fueling the soaring prices that are dominating the U.S. economy and getting shafted by them.

This measure – called the Employment Cost Index – is tracked by the Department of Labor, and is watched closely by the Federal Reserve (the government’s chief inflation-fighting agency) for two major reasons. First, it includes not just wages, but salaries and non-cash benefits. Second, unlike the Labor Department’s average wage figures, it takes into account what economists call compositional effects.

In other words, the those wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by factoring in the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

In his press conference last Wednesday following the Federal Reserve’s announcement of a second straight big increase in the interest rate it controls directly, Chair Jerome Powell mentioned that the ECI report coming out on Friday would greatly influence the central banks’ decision on how much more tightening of credit conditions would be needed to slow the economy enough to cool inflation acceptably.

That’s because, as he has explained previously, the supposedly superior insights on worker pay provided by the ECI enable the Fed to figure out whether a major inflation engine has started to rev up – employee compensation rising faster than worker productivity. Industries (or entire economies) in this situation are denied the option of absorbing wage increases by achieving greater efficiencies in their operations Therefore, they face more pressure to maintain earnings and profits by passing pay increases onto their customers, their customers face more pressure to keep up with living costs by pushing for pay hikes themselves, and what economists term a classic and hard-to-break wage-price spiral takes off.

The new ECI results per se looked alarming enough from this perspective. They showed that between the second quarter of 2021 and the second quarter of 2022, total employee compensation for the private sector ose by 5.5 percent. That’s the fastest pace since this data series began in 2001. Moreover, this record represented the third straight all-time high. (RealityChek regulars know that private sector numbers are the most important gauge, since its pay and other indicators are mainly driven by market forces, unlike the statistics for government workers, where the indicators largely reflect politicians’ decisions.)

Sadly, though, according to the Fed’s favorite measure of consumer inflation (the Commerce Department’s Personal Consumption Expenditures price index), living costs increased by 6.45 percent. So workers fell further behind the eight ball.

Perhaps worst of all, however, productivity growth is in the toilet. We won’t get the initial second quarter figures until September 1, but during the first quarter, for non-farm businesses (the most closely followed measure for the private sector), it fell year-on-year by 0.6 percent – the worst such performance since the fourth quarter of 1993.

Nor was this figure a one-off for the current high inflation period. From the time consumer prices began their recent speed up (April, 2021) through the first quarter of this year, labor productivity is off by 1.36 percent, the ECI is up 3.95 percent, and PCE inflation has risen by 4.65 percent. So a strong case can be made that workers, businesses, and the economy as a whole are in the worst of all possible worlds.

Whenever productivity is the subject, it’s important to note that it’s the economic performance measure in which economists probably have the least confidence. And even if it’s accurate, don’t jump to blame workers for sloughing off. Maybe management is doing a lousy job of improving their productivity. Alternatively, maybe managers simply haven’t figured out how to do so in the midst of so many unusual challenges posed by the pandemic and its aftermath – chiefly the stop-go nature of the economy’s early aftermath, and the resulting turbulence that, along with the Ukraine war and China’s Zero Covid policy, is still roiling and stressing supply chains.

Whatever’s wrong, though, unless a course correction comes soon, it looks like the odds of the economy sinking into prolonged stagflation – roaring inflation and weak economic growth – are going up. And ultimately, that matters more to the American future than whether some form of recession is already here, or around the corner.

(What’s Left of) Our Economy: The Real Message Behind the New U.S. Inflation Figures

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bubbles, consumer price index, core PCE, CPI, energy, Federal Reserve, inflation, Jerome Powell, monetary policy, PCE, personal consumption, personal consumption expenditures index, productivity, recession, {What's Left of) Our Economy

There – that wasn’t so hard, was it? Meaning that if a national government (including its central bank) wants to get inflation down, it’s not a rocket science-type challenge. Elected officials (or dictators) can cut public spending, monetary authorities like America’s Federal Reserve can tighten monetary policy, and voila. Receiving less financial juice, consumers stop consuming so much, businesses stop investing and hiring so robustly, and the lower level of economic activity begins depriving sellers of pricing power – at least if they want to keep their sales up. 

Moreover, these governments can enjoy the benefits of a venerable economic adage: an effective cure for high prices is high prices. That is, at some point, regardless of government policies, goods and services begin getting unaffordable. So businesses and consumers alike don’t buy so much of them, and the reduced demand also forces sellers that want to keep sales up to start marking them down.

At least that’s a message that’s easy to take away from the today’s new official report on U.S. “Personal Income and Outlays,” which, as usual, contains data on price increases and consumer spending, and which shows a softening in both.

Before delving into the specifics, however, it’s important to point out that (1) less economic activity means less prosperity – and in many instanaces can mean much worse – for most of the population; and (2), the higher inflation has become, the more belt tightening is needed, and the more economic suffering must be imposed, in order to bring it to levels considered acceptable. And since the new, better numbers from Washington still reveal price increases near multi-decade highs, it figures that returning to satisfactory inflation will require many Americans to experience significantly more economic pain.

In other words, the “soft landing” that Fed officials in particular describe as the goal of their anti-inflation policy – that is, taming inflation while still fostering some growth – still looks like much less than a sure bet. Even Fed Chair Jerome Powell acknowledges this.

Powell and many others insist that even if the landing is hard, the anti-inflation medicine will be necessary, since, in his words, “Economies don’t work without price stability.” Often they add that the steps necessary to defeat inflation will also help cure the economy of its long-time addiction to bubble-ized growth – that is, prosperity based on credit conditions that are kept way too loose, that deprive producers of the market-based disciplines needed to keep prosperity sustained, and that in fact spur so many bad and even reckless choices by all economic actors that they inevitably end in torrents of tears.

I’m sympathetic to these arguments, but the main point here is that killing off inflation per se has always been first and foremost a matter of will – which has clearly been lacking for too long. Avoiding recession, conversely, is no great accomplishment, either: Just keep inflating bubbles with easy money. It’s fostering soundly based, sustainable growth that’s been the challenge that American leaders have long failed to meet.

As for the specifics, let’s start with the inflation figures contained in today’s report from the Commerce Department. They’re somewhat different from the more widely covered Consumer Price Index (CPI) tracked by the Labor Department, but this Personal Consumption Expenditures (PCE) price index matters a lot because it’s the inflation measure favored by the Fed, which has major inflation-fighting responsibilities.

On a monthly basis, “headline” PCE inflation (the broadest measure) bounced up from April’s 0.2 percent (the weakest such figure since the flatlline of November, 2020) to 0.6 percent (the worst such figure since March’s 0.9 percent). The “core” figure (which strips out food and energy prices supposedly because they’re volatile for reason largely unrelated to the economy’s fundamental vulnerability to inflation), increased sequentially in May by 0.3 percent for the fourth straight month. Those are the smallest such increases since September, 2020’s 0.2 percent.

These results are one sign that spending has fallen off enough to prevent still strong energy inflation from bleeding over into the rest of the economy – just about all of which uses energy as a key input. And indeed, the new Commerce release reports that adjusting for inflation, personal consumption fell on month (by 0.4 percent) for the first time since last December (1.4 percent).

As known by RealityChek regulars, the annual rates of change are usually more important than the monthly, because they gauge developments over longer time periods and are therefore less likely to be thrown off by short-term developments or sheer statistical randomness. And encouragingly, they tell a similar story. The headline annual PCE inflation rate of 6.3 percent was the same as April’s, and lower than March’s 6.6 percent. Annual core PCE inflation dropped to 4.7 percent from April’s 4.9 percent and hit its lowest level since last November’s 4.7 percent – another sign that because consumers have pulled back, hot inflation in energy isn’t stoking ever stronger price rises elsewhere.

No one could reasonably call today’s inflation report “good” – especially since the baseline effect (which RealityChek readers know throughout 2021 produced annual inflation rates that were unusually high because of a catch-up effect from the unusually low inflation results of 2020) is gone. In other words, price increases much higher than the Fed’s two percent target rate are persisting.

But to this point, anyway, these increases aren’t coming faster – which is crucial because one reason inflation is so feared is its tendency to feed upon itself.

As pointed out above, though, weakening inflation by tanking the economy is no great triumph of economic policy. Worse, it’s all too easy to conclude from recent history that, even though a recession hasn’t officially arrived, once it does, most politicians will rev up the spending engines again, and (successfully) pressure the Fed to at least stop the tightening. And inflation will take off again. 

There’s a much better inflation-fighting alternative that’s available, at least in principle:  Increase the nation’s sagging productivity growth.  Boosting business’ efficiency enables companies to deal with cost increases — including wage hikes — without passing them on to consumers.  But a productivity rebound seems nowhere in sight, seemingly leaving the nation stuck in a pattern of blowing up bubbles to achieve periods of acceptable growth and employment, popping them at least occasionally to keep prices in check, and hoping the whole Ponzi scheme can somehow continue indefinitely.  

(What’s Left of) Our Economy: Will Americans Need “That Seventies Show” to Tame Inflation?

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consumer price index, consumers, CPI, demand, economics, elasticity, energy, Federal Reserve, food, inflation, interest rates, Jerome Powell, monetary policy, Paul A. Volcker, recession, retail sales, supply, {What's Left of) Our Economy

I haven’t commented much in detail on dccisions by the Federal Reserve to fight inflation, mainly because they’re so thooughly covered in the press. But yesterday’s announcement by the central bank that it would raise the short-term interest rate it controls by an amount not matched in nearly thirty years could loom especially large over the nation’s economic future, and some of its ramifications deserve more attention than they’ve received.

First, as widely noted, the Fed could be tightening monetary policy – in an effort to slow and eventually reverse price increases by slowing economic activity – even though a recession sooner rather than later looks likely. In fact, the timing of yesterday’s interest rate hike and seemingly solid assurances that increases will continue for the foreseeable future may be even stranger, because the recession may already be here.

Some important signs:  Yesterday also saw the release of a Census Bureau report indicating that U.S. retail sales dipped on a monthly basis in May.  If this result holds (and we’ll find out on July 15), that would mark the first such decrease since December, and the news would be ominous given the dominant role played by personal spending in the American economy. 

In addition, on top of the economy’s shrinkage during the first quarter of this year, a well regarded source of forecasts on the path of the gross domestic product (GDP – economist’s main measure of the economy’s size and how it changes) is predicting no growth whatever in the second quarter. That result would enable the nation to skirt a recession according to one popular definition of the term holding that such slumps only occur when GDP adjusted for inflation falls for two consecutive quarters.

At the same time, a flat-line real GDP for the second quarter would mean that, on a cumulative basis, the economy has contracted over a two-quarter stretch. That sounds like a pretty good approximation of a recession to me. In fact, this cumulative shrinkage could still take place even if after-inflation GDP eaks out a small gain between April and June. (We’ll get the first official read on the subject on July 28.)

And maybe more important, when it comes to the lives of most Americans, what’s the difference between a recession (especially if it’s modest) and very slow growth? Indeed, for the record, the Fed itself yesterday lowered its own projection for real U.S. growth for this entire year from 2.8 percent to 1.7 percent.

Second, examining the Fed’s inflation-fighting record during the late-1970s – which it’s also been widely noted bears some strong resemblances to the present – raises immense questions regarding the central bank’s chances of making major inflation progress without triggering a recession that would be anything but modest.

In case you’re not old enough to remember that historical episode, inflation was actually higher during the late-1970s, and also stemmed partly a combination of oil price shocks generated by overseas events plus a development that’s too often ignored nowadays – a substantial deterioration in the nation’s international financial position. Though this current account deficit back then was tiny by today’s standards, it had just become a noteworthy shortfall as a share of GDP after years of small surplus or balance, and was broadly interpreted as a sign that Americans’s spending was spinning out of control (You’ll find a great account of this period here.)

As current Fed Chair Jerome Powell is fond of recalling, that towering late-1970s inflation was broken mainly by the steadfastness of that period’s Chair, Paul A. Volcker – who raised interest rates to levels that were as astronomical as they were wholly unprecedented. But although Volcker took the helm of the Fed when inflation (as measured by the headline Consumer Price Index, or CPI) wasn’t that much higher than today’s rates, it took a near-doubling of these rates from levels that also were much higher than today’s to bring price increases down to acceptable levels, and even this effort took three and a half years and dragged the economy into not just one, but two recessions – and severe ones at that. (My sources for the interest rate infomation is here. For the inflation and growth data, I’ve relied on the official government data tables I always use.)

Specifically, on Volcker’s first day as Fed Chair (in August, 1979), the federal funds rate it controls stood at 11 percent – versus the 1.75 percent ceiling to which the Powell Fed just approved. The annual inflation rate was 11.84 percent – versus the 8.52 percent recorded last month. And the economy was growing by three percent annually – versus the current rate of probably one percent at best.

Volcker engineered rate hikes to the 20 percent neighborhood – three times! (as depicted in the chart below) – and recessions that produced real GDP nosedives of eight and 6.1 percent (in the second quarter of 1980 and the first quarter of 1982), but the CPI didn’t retreat back into the single digits until May, 1981, and it took until the end of 1982 for a read of 3.8 percent to be recorded.

 

That history doesn’t seem to warrant much optimism that the Powell Fed can cut headline inflation to 5.2 percent by year end while increasing rates only to 3.4 percent (as it’s now expecting).

Third, at his press conference following the rate hike announcement, Powell echoed the conventional wisdom: that although the Fed can cut excessive levels of economic demand enough to tame inflation, it can’t address inflation by affecting economy’s ability to create enough supply to meet that demand, and thereby restore a satisfactory inflationary balance between the two.

But supply and demand are actuallly very closely connected. As I’ve discussed when posting about possible tariff cuts on imports from China, when consumer demand is strong enough, companies can pass along increases in their prices because their customers literally are willing to pay. When consumers are cautious, however, such price hikes become much more difficult.

To be sure, these rules don’t always hold. The big exceptions are products on which consumers will cut spending only as a last resort – like food and energy. They’re (rightly) seen as so important that demand for them is called “inelastic” by economists.

Since food and energy prices have been so central to today’s inflation, it’s easy to see why the conventional wisdom on the Fed and the economy’s supply side is generally accepted. But it’s also true that if consumers become stressed enough (for example, by interest rate increases high enough to slash growth, employment, and income levels), they’ll cut their overall spending even if they keep paying higher prices for those staples. Further, they can in principle reduce their purchases on non-staples enough to bring demand down substantially, and with it, inflationary pressures.

No one could reasonably relish this kind of outcome. But if the 1970s experience teaches any lessons for today, it’s that serious hardship for much of the population can’t be avoided if the inflation war is to be won. In my view, Powell has rightly stated that this victory is essential for America’s long-term prosperity. And President Biden deserves credit for endorsing such priorities. But will the Fed Chair actually take the Volcker-like steps needed to beat down inflation? Will a U.S. President still declaring he wants to be reelected remain a fan if he does? Because I can’t yet bring myself to believe either proposition, I can’t yet bring myself to be optimistic that inflation will drop significantly any time soon.

(What’s Left of) Our Economy: One Reason Wages May Indeed be Fueling U.S. Inflation

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business, consumer price index, ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, labor productivity, management, multifactor productivity, productivity, wages, workers, {What's Left of) Our Economy

As known by RealityChek regulars, I’ve pushed back strongly (e.g., here) against claims that today’s historically lofty levels of U.S. inflation have been driven largely or even significantly by wage costs. My main point: However healthy, if the wage increases American workers have gained recently lag behind the overall increase in prices across the entire economy – which has been the case – then how can they deserve much blame?

Even so, one other consideration needs to be added to the mix. It was mentioned by Federal Reserve Chair Jerome Powell in his press conference following the central bank’s announcement of its monetary policy decisions during the December meeting of its Open Market Committee (the partly rotating group of Fed governors that determines short-term interest rates and, more recently, the pace of bond buying or selling).

As Powell stated, the Fed is watching “the risks that persistent real wage growth in excess of productivity [growth] could put upward pressure on inflation.” That’s because when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.

Powell also said that “we don’t see that yet.” But in fact, if you compare one measure of employee pay that he’s been watching closely with the most current measure of productivity growth, that’s exactly what you’ll see – and been happening consistently for two decades.

The pay gauge in question is the Employment Cost Index (ECI) created by the Labor Department. What’s especially useful about it is that is takes into account not only wages and salaries, but the full range of benefits workers receive. This data series goes back to 2001, and if you (1) look at the total compensation figures for all private sector workers (as always, I leave out government workers because their pay is determined largely by politicians’ decisions, not market forces) in pre-inflation terms, then (2) place them side-by-side with the inflation results, and then (3), check these against the Labor Department’s labor productivity results, it’s clear that pay has been rising considerably faster than productivity.

For example, during largely high-inflation 2021, the employment cost index (which is measured quarterly) rose on an annual basis during all four quarters.Yet during the second, third, and fourth quarters of last year, labor productivity by the same yardstick improved more slowly than the ECI. In other words, worker pay was rising faster than productivity.

Nor are these results atypical. In fact, from the first quarter of 2001 through the fourth quarter of last year, the ECI is up 74.12 percent but labor productivity is up jus 47.62 percent.

Another way to look at the subject: Before the fourth quarter ECI and labor productivity results came out (on January 28 and February 3, respectively), I looked at the annual changes in both sets of data for the third quarters of each year going back to 2001. During those 21 third quarters, annual productivity growth lagged annual ECI growth in 15.

It’s important to note that these conclusions don’t automatically justify assuming that worker compensation increases are a major driver of today’s inflation after all, much less that productivity growth’s relatively slow advance is employees’ fault. After all, as just noted, labor productivity has been rising more sluggishly than the ECI for two decades. Inflation didn’t take off until last year. Moreover, the labor productivity number reflects far more than the amount of physical and/or mental effort workers put into their jobs. It’s also a function of how well business owners perform – e.g., in terms of giving their employees the equipment and training they need to do their jobs effectively, and of organizing their companies in ways that maximize performance.

In addition, labor productivity isn’t the only gauge of efficiency monitored by the Labor Department. Multifactor productivity (also known as total factor productivity) is tracked, too. This data series, as its name implies, tries to determine efficiency by examining all the inputs that go into corporate operations – including not just person hours worked, but capital, energy, materials, and all the services that are used to produce goods and, yes, other services.

I haven’t compared the trends in the ECI and multifactor productivity, though, for one big reason: Because it depends on collecting so much more information, the multifactor productivity results come out much more slowly than the labor productivity reports. And the 2021 figures don’t seem to be due out for several months.

Finally, as I’ve also noted (see, e.g., here), most economists believe that productivity is one of the most difficult features of the economic landscape to measure. So the wage and productivity comparisons should be viewed with some non-trivial amount of caution. 

Yet if worker compensation is indeed rising faster than productivity, that’s a story that’s unlikely to end well for the U.S. economy. Maybe those multifactor productivity figures – whenever the heck they’re released – will provide some much needed further clarity. 

 

(What’s Left of) Our Economy: The Transitory Inflation Story Endures

Tags

CCP Virus, consumer price index, core inflation, coronavirus, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jay Bhattacharya, Jerome Powell, lockdowns, mandates, shortages, stimulus, supply chains, vaccine mandates, Wuhan virus, {What's Left of) Our Economy

Rather than presenting a good news/bad news story, today’s official U.S. figures on one key measure of inflation (bringing the story through December) put into pretty clear focus an important old news/new news story. And its main implication is that the current version of lofty inflation looks considerably different from the standard versions that have hit the nation previously. Therefore, it’s looking more “transitory” (at least in terms of stemming mainly from developments specific to the CCP Virus epidemic) than ever.

This distinction of course matters because evaluating the nature of today’s inflation will greatly influence how American policymakers (especially the Federal Reserve) respond, and how they should respond. If today’s price increases stem from standard sources, then a standard response – tighter monetary policy, less government spending – make sense. If current inflation is distinctive, more austere economic policies stil may be needed for any number of reasons, but inflation-fighting won’t be a strong one.

The new news? The U.S. government tracks two main measures of inflation: Overall price increases, and price increases for “core” goods and services. The latter gauge strips out food and energy prices – because ordinarily they’re supposed to be extraordinarily volatile for reasons mainly unrelated to the economy’s underlying inflation prone-ness.

But today’s inflation data (for what’s called the Consumer Price Index, or CPI), demonstrates that during the virus era, the core price increases have been more volatile than their overall counterparts.

Let me make clear two crucial points right at the outset, though: First, as I’ve written previously, “transitory” (a term used for months but “retired” recently by the Federal Reserve) doesn’t necessarily mean “short-lived.” That’s because the virus itself and its effects may well not be short-lived. Indeed, because of the unusually rapid spread of the Omicron variant, pandemic-related and inflation-fueling economic disruptions could well last for months more.

Second, viewing today’s inflation as transitory doesn’t mean that the Biden administration and Congress may not have made a serious mistake in supporting a major round of economic stimulus earlier this year – and therefore greatly boosting Americans’ spending power while the amount of goods and services remained limited for all sorts of (CCP Virus-related and other) reasons.

At the same time, precisely because the last stimulus bill was explicitly linked to the the pandemic’s effects, because the infusion of new money has been running out, and because President Biden’s Build Back Better bill looks pretty dead in Congress, this fiscal policy mistake’s effects are looking transitory, too.

Don’t forget, moreover, the immense monetary policy support for the economy provided by the Fed. It’s virus-related, too, and yesterday, Chair Jerome Powell made clearer than ever his view that the case for such emergency assistance no longer holds, and that the central bank’s decision to start withdrawing it is firmly on track.

In addition, some of the old news (at least for RealityChek readers) about today’s inflation still holds – and further reenforces the case for “transitory-ness.” And this old news concerns the baseline effects phenomenon – by which unusual results recorded at the beginning of a period of time in which comparisons are made exercise powerful, but intrinsically, misleading results at the end of that period. In this instance, the unusually low annual inflation numbers of 2019-2020 have been bound to play a significant role in generating abnormally strong increases for 2020-2021. (BTW, savvy investors take these baseline effects into account when evaluating stock performance, too. Just Google “easy comps.”)

Nevetheless, even this old news now reflects some of the new news. Meaning that for overall inflation, the baseline effect is fading and will continue to fade for the next two data months. For the core, however, the baseline effect will stay strong through March.

The month-by-month and year-by-year figures for both overall and core CPI illustrate all of these points nicely. First, let’s review the monthly changes in overall CPI for this calendar year:

Dec-Jan:                          0.26 percent

Jan-Feb:                          0.35 percent

Feb-March:                     0.62 percent

March-April:                  0.77 percent

April-May:                     0.64 percent

May-June:                      0.90 percent

June-July:                      0.47 percent

July-Aug:                      0.27 percent

Aug-Sept:                      0.41 percent

Sept-Oct:                      0.94 percent

Oct-Nov:                       0.78 percent

Nov-Dec:                      0.47 percent

That new December figure represents both the smallest such increase since July, and a big slowdown from November. So that’s a noteworthy sign of transitory-ness right there.

Yet on a monthly basis, as shown below, core inflation actually quickened a bit in December:

Dec-Jan:                      0.03 percent

Jan-Feb:                       0.10 percent

Feb-March:                  0.34 percent

March-April:                0.92 percent

April-May:                   0.74 percent

May-June:                    0.88 percent

June-July:                     0.33 percent

July-Aug:                     0.10 percent

Aug-Sept:                    0.24 percent

Sept-Oct:                     0.60 percent

Oct-Nov:                     0.53 percent

Nov-Dec:                    0.55 percent

A closer look, however, shows that the core’s ups and downs have been greater than that for overall inflation, and that was especially true early in the pandemic. From January through April, it skyrocketed from 0.03 percent to 0.92 percent, whereas overall price increases went up more slowly (though still impressively), from 0.26 percent to 0.74 percent.

Similar increase patterns are revealed in the annual overall and core inflation increases, but the volatility trends are somewhat different. First, the overall data:

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.16 percent

May:                          4.93 percent

June:                          5.32 percent

July:                           5.28 percent

Aug:                           5.20 percent

Sept:                          5.38 percent

Oct:                            6.24 percent

Nov:                           6.88 percent

Dec:                           7.12 percent

Here the nation has experienced not only accelerating annual inflation, but a fourth straight month of acceleration.

Ditto for annual core inflation:

Jan:                            1.40 percent

Feb:                            1.28 percent

March:                       1.65 percent

April:                         2.96 percent

May:                          3.80 percent

June:                          4.45 percent

July:                          4.24 percent

Aug:                          3.98 percent

Sept:                          4.04 percent

Oct:                           4.58 percent

Nov:                          4.96 percent

Dec:                           5.49 percent

But rather than being more volatile early in the pandemic period, these prices sung the most between last June and September, and during December. Still, if the volatility of overall and core inflation have been in the same ballpark lately, that’s an indication that this most recent burst of inflation has broken the mold.

The baseline effects are also signaling the recent outsized volatility of core inflation. Since it was so unusually depressed early in the first pandemic year 2020, these effects, as mentioned above, will stay prominent in January and February, too. But the baseline effect for regular inflation is already fading and will continue on that path. 

As has been the case for nearly two years now, however, the wild card remains the CCP Virus and now its Omicron variant and even more particularly, government reactions to its stunning transmissability. Moreover, it’s not just the Biden administration that may contribute to inflation-boosting supply chain bottlenecks and shortages due to vaccine mandates, other curbs, and their impact on individual fears and behavior. China’s ongoing Zero Covid policy looms as a major threat, too.     

All of which brings up a point made by Stanford University medical school professor Jay Bhattacharya, a leading public health authority. He’s repeatedly written that “The end of the pandemic is primarily a social and political decision” because although “we have no technology to eradicate the virus,”`the knowhow and strategies for reopening safely and sustainably are already available. If, as I believe, he’s right, then ending virus-induced inflation and making it truly transitory is well within reach, too.  

 

(What’s Left of) Our Economy: The Case for Inflation Optimism Survives!

Tags

consumer price index, core inflation, CPI, Federal Reserve, inflation, inflation-adjusted wages, Jerome Powell, Labor Department, real wages, stimulus, transitory, {What's Left of) Our Economy

Call me a cockeyed optimist, but today’s official U.S inflation figures (for November) still leave me uncertain as to how lasting recent strong price increases are going to be. One obvious (at least to me) reason: Whereas the release of the October Consumer Price Index (CPI) figures showed major month-to-month acceleration of inflation, the November results show some easing.

That’s the case, moreover, both for the overall inflation numbers and for so-called core inflation, which strips out food and energy prices supposedly because they can be volatile for reasons unrelated to the economy’s overal prone-ness to inflation (like bad weather or the policies of foreign cartels).

Acceleration was still displayed by the annual results for both inflation gauges. But the speedup between October and November was somewhat slower than that between September and October. And here we get to the second reason for my continued (though tempered) optimism: This year-on-year pickup still looks partly due to baseline effects created by the unusually weak price increases of last year, when the CCP Virus pandemic was holding back economic activity more than this year. In other words, inflation may still be playing catch-up, and even more frustrating, this kind of distortion could affect the inflation figures for a few more months.

So let’s take a look at the data to see the basis for my arguments. First, this year’s monthly increases in overall inflation:

Dec-Jan:                          0.26 percent

Jan-Feb:                          0.35 percent

Feb-March:                     0.62 percent

March-April:                  0.77 percent

April-May:                     0.64 percent

May-June:                      0.90 percent

June-July:                      0.47 percent

July-Aug:                      0.27 percent

Aug-Sept:                     0.41 percent

Sept-Oct:                      0.94 percent

Oct.-Nov:                     0.78 percent

As is clear, the November rise is still high, but it’s down not trivially from October’s rate – which was the fastest since June, 2008’s 1.05 percent.

The same pattern is apparent for core inflation:

Dec-Jan:                       0.03 percent

Jan-Feb:                       0.10 percent

Feb-March:                  0.34 percent

March-April:                0.92 percent

April-May:                   0.74 percent

May-June:                    0.88 percent

June-July:                     0.33 percent

July-Aug:                     0.10 percent

Aug-Sept:                    0.24 percent

Sept-Oct:                     0.60 percent

Oct-Nov:                     0.53 percent

As mentioned, the year-on-year overall CPI continues to accelerate, though November’s speedup was smaller than October’s. Here are those statistics:

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.16 percent

May:                          4.93 percent

June:                          5.32 percent

July:                           5.28 percent

Aug:                           5.20 percent

Sept:                          5.38 percent

Oct:                            6.24 percent

Nov:                           6.88 percent

Ditto for annual core inflation:

Jan:                            1.40 percent

Feb:                            1.28 percent

March:                       1.65 percent

April:                         2.96 percent

May:                          3.80 percent

June:                          4.45 percent

July:                          4.24 percent

Aug:                          3.98 percent

Sept:                          4.04 percent

Oct:                           4.58 percent

Nov:                          4.96 percent

But for me, those baseline effects make both annual inflation rates look a good deal less alarming. Here are the monthly year-on-year overall CPI inflation rates for 2019-2020:

Jan:                            2.47 percent

Feb:                            2.31 percent

March:                       1.51 percent

April:                         0.34 percent

May:                          0.22 percent

June:                          0.73 percent

July:                          1.05 percent

Aug:                          1.32 percent

Sept:                         1.41 percent

Oct:                          1.19 percent

Nov:                         1.14 percent

November’s read was the lowest since August, and represents the third straight month of slowdown that year. And as I wrote last month, percentages with “ones” in front of them had last been seen in the summer of 2017, and these were well above 1.50 percent. So yes, the total annual inflation figures for this year have been rising each month, but these percentage change continue to result partly from 2019 rates that were abnormally low.

And those previous annual rates remained abnormally low in December (1.30 percent) and even into January (1.37 percent). So the baseline effect will start fading, but won’t be reduced to insignificance until March (because by then the previous annual rate had hit 2.64 percent).

The same baseline argument holds for core inflation. Here are its 2019-2020 annual rates of change for each month:

Jan:                           2.26 percent

Feb:                          2.36 percent

March:                      2.10 percent

April:                        1.44 percent

May:                         1.24 percent

June:                         1.20 percent

July:                         1.56 percent

Aug:                         1.70 percent

Sept:                        1.72 percent

Oct:                          1.63 percent

Nov:                         1.63 percent

Most of the absolute numbers are higher, but you see the same very low figures starting in April. And if you still doubt that they’ve been out of the ordinary, as also noted last month, these increases had stayed above two percent since March, 2018. Moreover, similar to the overall CPI, the annual baseline for the core won’t pierce that level until spring (in this case, in Apri. Indeed, before then, this baseline’s set to drop even furtherthrough Febuary, as shown here:

Dec:                         1.61 percent

Jan:                          1.40 percent

Feb:                         1.28 percent

March:                    1.65 percent

April:                      2.96 percent

Please don’t get the idea that I’m slighting the seriousness of recent inflation. There are plenty of reasons for Americans to be angry. The particularly high levels of overall CPI indicate that inflationary pressures are concentrated significantly in food and energy – categories that are not only highly visible to consumers, but essential.

In addition, the cumulation effect has to be kept in mind. Whether it comes to monthly or annual inflation rates, when they come down, that doesn’t mean that prices are actually falling in absolute terms. It simply means that they’re rising more slowly – and for most of this year from levels that are high by recent standards. For example, if prices are up one percent sequentially one month and half a percent the next, they’ve risen a total of 1.505 percent in a two-month span alone. That can really add up over time.

Finally, due to the fall in real wages, the typical American is seeing his and her purchasing power and living standards drop. In fact, in addition to issuing the CPI figures, the Labor Department also came out with the inflation-adjusted wage numbers. In November, they declined by 0.45 percent for all private sector workers, and by 0.41 percent for production and non-supervisory workers. (As known by RealityChek regulars, the Labor Department doesn’t monitor wage data for government workers because their pay is set largely by politicians’ decisions, not by economic fundamentals.)

And since January, real wages for the entire private sector are down 2.45 percent, and for latter, down 1.93 percent.

Warnings that inflation tends to feed on itself certainly shouldn’t be discounted. But even though today’s inflation has stayed higher for longer than many leading economists and analysts (like Federal Reserve Chairman Jerome Powell) have expected, the November numbers increase my confidence that the economy is moving closer to its ebbing.  And this progress should be reenforced by the end of stimulus payments individuals and families, signs that the supply chain crisis is (slowly, to be sure) coming to an end, the diminishing likelihood that Congress will pass President Biden’s Build Back Better spending bill, and the Fed’s own decision to reduce the stimulus it’s long been injecting into the economy in the form of bond buying. 

Further, as noted just above, the much-feared wage-price spiral, which fueled damaging inflation most recently in the 1970s, hasn’t taken off.

But a waning of inflation could well be accompanied by some genuinely bad news – involving a waning of growth. And sustaining an economic expansion strong enough to keep employment and wages at healthy levels but that doesn’t depend heavily on artificial government crutches is a test that U.S. leaders haven’t passed in decades.             

(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory No Matter How You Look at It

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CCP Virus, consumer price index, coronavirus, COVID 19, CPI, Fed, Federal Reserve, inflation, Jerome Powell, PCE, personal consumption expenditures index, supply chain, transitory, Wuhan virus, {What's Left of) Our Economy

I’m still in the “U.S. inflation is transitory” camp and still not overly worried about recent price increases because they look to be products of the CCP Virus and the sudden stop-start pattern is produced in the economy and not stronger, more lasting changes. But it’s important to note that my arguments have been based on only one of two major groups of official statistics – the consumer price index (CPI) kept by the Labor Department. (See, e.g., here.) 

The continuing growth of inflation worries among economists and the public indicates that this is a good time to look at that other data set – the personal consumption expenditures (PCE) price index tracked by the Commerce Department. Another good reason: This is the inflation measure preferred by the Federal Reserve, one of whose two main missions is preventing hot inflation (the other being maintaining employment), and of course this central bank’s monetary policy decisions are central to the nation’s success at keeping prices under control.

My bottom line: The PCE figures seem to support the transitory viewpoint as well.  The Fed believes this, too. But many other serious students of the economy, as indicated above, have taken exactly the opposite interpretation of the latest PCE results, so let’s try and identify what’s troubling them, and in the process, see how they differ from their CPI counterparts.

A big part of the answer comes from these side-by-side comparisons. The table below shows how both gauges have measured month-to-month price increases this year so far (through August) in percentage terms.

                          CPI                          PCE

Jan.                    0.3                            0.3

Feb.                   0.4                            0.3

March               0.6                             0.6

April                 0.8                             0.6

May                  0.6                             0.5

June                  0.9                             0.5

July                  0.5                              0.4

August             0.3                              0.4

Interestingly, although the PCE changes are steadier, they show that, at least on a monthly basis, inflation’s momentum displays no signs of speed-up – which matters greatly because inflation is a problem that can so easily feed on itself (as expectations of ongoing price increases spur businesses and consumers to increase their purchases more, boosting demand and thus pushing prices yet higher). In fact, the PCE numbers reveal deceleration, too on this basis.

Also worth stipulating: both these inflation measures include food and energy prices, which often have little to do with the economy’s underlying inflation prone-ness (but which certainly do impact price changes overall). And as known by anyone who’s gassed up a vehicle lately, energy prices in particular have been surging recently.

But inflation watchers also look closely – often more closely – at year-on-year price increases, and that makes sense because data over longer timeframes is less susceptible to random or otherswise misleading fluctuations than data over shorter timeframes. So here are those year-on-year results for both inflation indices in percentage terms for the first eight months of this year:

                          CPI                          PCE

Jan.                    1.4                            1.4

Feb.                   1.7                            1.6

March               2.6                             2.5

April                 4.2                             3.6

May                  4.9                             4.0

June                  5.3                             4.0

July                  5.3                              4.2

August             5.6                              4.3

These numbers clearly are the cause of the inflation concerns, as they do show not only strong but accelerating momentum.

But they don’t show it conclusively or, in my view, in any way that undermines the transitory school of thought. And the reason is that inflation was so low in pandemic-dominated 2020 that a combination of mean reversion and virus-induced supply chain disruptions and consequent shortages was bound to generate higher than normal price increases.

This table makes the point, by showing how low the yearly inflation increases in percentage terms were for the bulk of last year, and especially during the early spring, when the economy fell into a deep (but short) recession.

                          CPI                          PCE

Jan.                    2.5                            1.9

Feb.                   2.3                            1.8

March               2.6                             1.3

April                 0.3                             0.5

May                  0.2                             0.5

June                  0.7                             0.9

July                  1.0                             1.1

August             1.5                             1.4

It’s still possible to argue that, however low 2019-2020 inflation became, it quickened to some extent starting in June (according to both measure). And because the 2020-2021 results also show increasing post-June momentum, inflation is still worsening.

My rejoinder – the post-June inflationary momentum this year so far is much slower than last year’s. Between June and August, 2019, for the PCE, the yearly inflation rate increased by 55.56 percent (from 0.9 percent to 1.4 percent). Between this June and August, that increase was just 7.5 percent (from four to 4.3 percent).  For the CPI, you can see that this difference was even bigger.

Moreover, even this year’s modest post-June inflation speed-up has only lasted for two months.

But don’t think for a minute that the inflation news is all good. Principally, even the optimistic Fed now believes that the transitory developments that have pushed inflation higher this year will last longer than it had been expecting. Just last week, Chair Jerome Powell said it was “frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.”

In other words, “transitory” may be pretty long-lasting, and the longer it lasts, the more pressure the Fed will face to cool the economy off faster, probably slowing job creation and wage increases, whether it holds to its diagnosis or not.

(What’s Left of) Our Economy: Why the Fed is Still (Really) Dovish on Economic Stimulus

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CCP Virus, coronavirus, COVID 19, Employment, Federal Reserve, global financial crisis, Great Recession, interest rates, Jerome Powell, lockdowns, monetary policy, moral hazard, QE, quantitative easing, recovery, stimulus, taper, transitory, Wuhan virus, {What's Left of) Our Economy

Yesterday, I tweeted that the Federal Reserve’s just-published statement on its policy plans looked pretty dovish – that is, signaling a continued determination to keep pouring massive amounts of stimulus into the U.S. economy. Most every other student of the economy worth heeding read exactly the opposite into the message and some related materials it issued – including Chair Jerome Powell’s statement at his subsequent press conference that the central bank could start easing off the accelerator as early as November. (One notable exception:  CNBC’s Steve Liesman.)  

Here’s why I’m right – at least in the most important senses – and why the dovishness I see isn’t great news for the American economy at all over any serious length of time.

The folks reading hawkishness into the Fed’s stance pointed to three main reasons for their conclusion, and I’d be the last person to ignore them. First, the policy statement did declare that “moderation” in the central banks’ bond-buying program, known as “quantitative easing” (QE) “may soon be warranted” if the economy’s progress “continues broadly as expected.” That’s a big change even from the July statement’s analysis:

“Last December, the [Fed] indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the [Fed] will continue to assess progress in coming meetings.”

Second, at the press conference, Powell not only hinted at a November start for the so-called “taper” of Fed bond buying.  He added that the process could conclude “around the middle of next year.” So although the change is expected to occur gradually, the Fed is indicating it won’t take forever to accomplish. 

Third, in a regularly issued graphic summary of their (anonymous) future expectations (called the “dot plot”), fully half of these policymakers made clear they anticipated that next year would also see the interest rate they control begin rising. As Powell told the press, taking this step would mean that these Fed officials had seen much more economic progress than that required for the taper of bond purchases they appear ready to begin.

I actually agree that this evidence adds up to more Fed “hawkishness.” But “more” clears only a very low bar for an institution that’s been super-dovish for the better part of the last decade and a half (since it decided to fight the Great Recession following the 2007-08 global financial crisis by opening up the stimulus spigots to an unheard of extent).

In other words, a Fed that for many more months will be continuing to spur growth and employment by purchasing tens of billions of dollars of bonds every month (only less than the current $120 billion) still looks pretty devoted to easy money to me.

At least as important, Powell in particular made clear that the Fed’s expectations for ending what are, after all, measures taken to counter the Covid-induced economic emergency are so fragile that he and his colleagues could change their minds as soon as the current recovery – which has been strong by most measures – veers off track.

It’s true that at the press conference, the Chair stated that all it would take for him to decide that employment was still improving enough to support a prompt beginning of tapering would be a “reasonably good” and “decent” official U.S. jobs report come out next month – not a “knockout, great, super strong” result. (Powell already believes that the nation’s inflation record – the Fed’s other main “taper test” has already been good enough to warrant reducing those bond purchases.)

But aside from questions about how Powell defines “reasonably good,” etc., his remarks show that he (along with his policymaking colleagues, over whom he wields considerable influence) still believes that a single poor jobs report, or similar discouraging development, would suffice to keep the economy on its exact same monumental levels of literal life support even though the patient has long exited the emergency room.

And these exacting standards for merely reducing current stimulus gradually (which, as the Chair himself noted, would still leave its asset holdings “elevated” and “accommodative”) tell me at least that, however well the economy performs, the Fed will be remaining on a super easy-money course pretty much indefinitely.

The one development that could change this picture significantly: a big, sustained takeoff of inflation.

But if Powell’s right (which I believe he is), then the current burst of higher prices results from “transitory” developments peculiar to the dramatic stop-start dynamics created by the pandemic and its policy and behavioral fall-out. Prices, therefore, should start normalizing before too long.

So what’s the problem? First, if the Fed is afraid that the U.S. economy can’t prosper adequately without what are essentially massive government subsidies, that’s a pretty damning indictment of that economy’s ability to generate satisfactory levels of growth and employment and living standards improvements more or less on its own.

Even more important, even if this Fed judgment is wrong, clearly it’s going to keep the stimulus flowing at historically unheard of rates, and historically, anyway, super easy-money has undermined financial stability – and disastrously – by creating what economists call “moral hazard.” That’s the condition in which over-abundant, dirt-cheap resources produce any number of reasons for using these resources foolishly (i.e., unproductively). After all, they drive down the economic penalties for making these mistakes to rock bottom levels by all but eliminating interest costs.

And an economy that uses resources so inefficiently is bound to run into big trouble before too long and suffer punishing and lingering after-effects. If you’re skeptical, think back to that devastating financial crisis and Great Recession – which weren’t so long ago – and to the slowest U.S. recovery in decades that followed. If that’s not persuasive enough, ask yourself why even the easy-money pushers at the Fed are talking about tapering in the first place.

(What’s Left of) Our Economy: Let’s Hope the Lousy New U.S. Trade Figures are Transitory, Too

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Commerce Department, Donald Trump, exports, Federal Reserve, GDP, gross domestic product, imports, Jerome Powell, real GDP, real trade deficit, tariffs, Trade, trade deficit, West Coast ports, {What's Left of) Our Economy

No two ways about it. Until the longer term revisions come in, the first quarter of 2021 was a lousy one for inflation-adjusted U.S. trade flows – and lousy to a record extent. The only possible positive takeaway:  These numbers and the trends underlying them might be just as transitory and CCP Virus-induced as I (and many others)  believe today’s high inflation numbers are   

According to today’s final (for now) Commerce Department read on economic growth for the first three months of this year, the real gross domestic product (GDP – the government’s measure for the economy’s size) increased by 6.21 percent on an annual basis.

That’s an excellent figure although (like virtually all other economic data) it’s a considerably artificial number (because of the sudden reopening of the economy after equally sudden government-mandated shutdowns and resulting consumer caution), and although it’s a bit less than the 6.25 percent estimated last month. Indeed, it’s a big improvement over the 4.26 percent registered in the fourth quarter of last year

But the after-inflation trade deficit figures just keep rising – and reaching all-time highs. The initial read on this constant dollar trade gap for the first quarter was an annualized $1.1755 trillion. Last month, this figure was revised up to $1.1939 trillion. This morning’s result: $1.2123 trillion. Consequently, the price-adjusted first quarter trade deficit turns out to be 8.05 percent worse than the fourth quarter’s $1.1220 trillion.

Optimists can note that this sequential increase was smaller than the 10.12 percent rise between the third and fourth quarters of last year. But this slowdown is pretty modest.

Since the real trade deficit figure is higher than previously reported and grew faster, and the total economy grew slightly more slowly in inflation-adjusted terms, the trade shortfall’s bite into growth was bigger – 1.50 percent out of the 6.21 percent increase as opposed to the previously reported 1.25 percent out of 6.25 percent growth.

This means that, had the real trade deficit simply remain unchanged, the economy would have expanded 24.15 percent more after inflation in the first quarter. The previous GDP read yielded a figure of 20 percent.

In glass-half-full terms, that’s a smaller subtraction from growth than the multi-decade high 35.92 percent suffered in the fourth quarter. But it’s a lot of foregone growth nonetheless.

The constant dollar trade deficit as a share of GDP hit another new record, too – 6.35 percent. Upon recalling that the previous pre-pandemic high of 6.10 percent came in the fourth quarter of 2005, during the bubble whose bursting brought on the global financial crisis and ensuing Great Recession, that could be an ominous development.

And more bad news: The worsening of the real trade deficit came on both the export and import fronts in the first quarter. Today’s GDP report showed that inflation-adjusted U.S. overseas sales of goods and services dropped sequentially by 0.53 percent, while total American purchases from abroad increased by 2.30 percent.

So do these new figures foreshadow the new post-CCP Virus normal for U.S. trade – despite (or because of?) the Trump tariffs? We’ll find out more about the effects of trade policy once the next official monthly U.S. trade figures (for May) come out next Friday. 

For now, though (and probably after those new data), the most responsible answer I can provide is, “It’s too soon to tell.” Indeed, as if the U.S. economy still wasn’t being distorted enough by the rapid transition from pandemic-induced recession to robust expansion, and still facing enough consequent uncertainties, on top of the ongoing congestion at U.S. West Coast ports, a big logjam has emerged at a giant port in export-heavy China.

Last week, Federal Reserve Chair Jerome Powell noted that “This is an extraordinarily unusual time, and we really don’t have a template or any experience in a situation like this. We have to be humble about our ability to understand the data.” As the new U.S. GDP report should be making clear, American trade flows are no exception.

(What’s Left of) Our Economy: More Reopening, Not Endless Money, is Now the Best Jobs Strategy

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African Americans, American Rescue Plan, Biden, CCP Virus, coronavirus, COVID 19, Covid relief, education, Employment, Federal Reserve, Hispanics, hotels, Jerome Powell, Jobs, Latinos, leisure and hospitality, lockdowns, recovery, restaurants, shutdown, stay-at-home, stimulus package, unemployment, wages, Wuhan virus, {What's Left of) Our Economy

There’s no doubt that the American jobs market has suffered an out-and-out disaster since it got hit by the CCP Virus and the follow-on lockdowns and other restrictions. There’s also no doubt that many workers and their families are still suffering greatly, and will need government aid to make it to the Other Side, and the Biden administration’s American Rescue Plan legislation that the President will likely sign into law soon will help fill this gap.

Plenty of doubt remains, however, about whether all, or close to all, of the massive funds approved in this measure are actually needed to cure the economy’s remaining employment woes, and one of the main reasons is the nature of the jobs blow that’s been delivered. Because it’s been so heavily concentrated in the country’s leisure and hospitality industries (encompassing eateries and drinking places of all kinds, plus hotels and motels, and entertainment and cultural venues), it’s entirely possible that nowadays, the most effective way to fix the jobs market fastest would be to lift the lockdowns and other mandated curbs that have fallen so hard on sectors that depend on serving in-person customers.

The case for relying on a virus-relief/stimulus package this big, at this stage of the economy’s recovery from its pandemic-induced recession, has been eloquently stated by President Biden and by Federal Reserve Chair Jerome Powell. The former warned just before the legislation passed that the U.S. economy “still has 9.5 million fewer jobs than it had this time last year. And at that rate, it would take two years to get us back on track.”

The latter has stated that he won’t be satisfied that full employment has returned until he sees what one reporter has called “broad-based gains in employment, and not just in the aggregate or at the median.” As a result, the Fed Chair is paying particular attention to (the reporter’s words again) “Black unemployment, wage growth for low-wage workers and labor force participation for those without college degrees, categories that historically have taken longer to recover from downturns than broader metrics.”

But it’s precisely these less fortunate portions of the workforce that would be helped disproportionately – and then some – by focusing on reopening steps that would surely affect the leisure and hospitality industries just as disproportionately.

If you doubt the importance of leisure and hospitality job loss over the last year in terms of overall U.S. jobs loss, here’s what you need to know. Of the 8.068 million positions shed by the country’s private sector between last Februrary (the final month of pre-CCP Virus normality for the American economy), fully 3.451 million have come in the leisure and hospitality industries. That’s nearly 43 percent.

Put differently, during that final normal economic month, leisure and hospitality workers represented just 13.04 percent of all private sector workers. Yet their employment plunge was more than three times as great relatively speaking.

Moreover, leisure and hospitality’s progress in getting back to pre-pandemic square one has been slower than that of the private sector overall. Since the April employment trough, leisure and hospitality has regained 4.955 million of the 8.224 million jobs lost during the worst of the pandemic, or 60.25 percent. For the private sector in toto, 13.267 million of the 21.353 million jobs lost in March and April have come back since – 62.13 percent.

It’s also clear that many of the kinds of workers about which Fed Chair Powell has been most concerned are concentrated in leisure and hospitality. For example, in 2019, (America’s last pre-CCP Virus full year), 13.1 percent of these sectors’ workers were African American versus 12.3 percent for the entire U.S. economy (including government workers at all levels), and 24 percent were Hispanic or Latino versus 17.6 percent for the entire economy.

Leisure and hospitality companies tend to employ Americans with low levels of formal education, too. According to the Labor Department, in 2019, 79.9 percent of the nation’s “first-line supervisors of house-keeping and janitorial workers” 25 years and older lack even an associate’s degree, and 76 percent of their food preparation and service counterparts fall into this category. The shares are even higher for the workers they supervise. Meanwhile, only 51.5 percent of all U.S. workers haven’t taken their education beyond high school.

Not surprisingly, therefore, leisure and hositality jobs pay poorly. In February, 2020, just before the arrivals of the pandemic and the lockdowns, their average hourly wages were only 59.28 percent those of all private sector workers. Last month, this figure had fallen to 57.58 percent. (See Table B-3 here.) 

For most of the pandemic period, the U.S. government at all levels pursued a mitigation strategy that aimed mainly at curbing economic and other forms of human activity across-the-board. Now, even with vaccinations and growing population-wide immunity showing strong signs of bringing the pandemic under control, the Biden administration and the Democratic Congress are just as determined to stimulate the economy that’s still significantly shut down by with an American Rescue Plan that seems just as indiscriminate.

As I’ve been writing (see, e.g., here), it should have been clear since late last spring that the anti-virus fight would have much more effective (and less harmful to the economy and other dimensions of public health) had it targeted protecting especially vulnerable populations. I strongly suspect that, with the fullness of time, it will become just as clear that a stimulus and jobs strategy emphasizing accelerating reopening, and thus aiding sectors and workers hardest hit by the remaining shutdowns, will prove a much more effective employment cure than the indiscriminate spending approach on which Washington has just doubled down.