The Swinging Pendulum - May 10, 2021

One year ago, the economy was in a freefall thanks to lockdowns and shelter-in-place orders. For many around the country, only businesses that were deemed essential were open.

What a difference a year makes. Today, the economy is booming. Demand is strong, companies are operating under fewer or no restrictions, and consumers are flush with cash thanks to stimulus checks and very generous jobless benefits.

Nonetheless, the economy created just 266,000 jobs last month, according to the U.S. Bureau of Labor Statistics, well below the 1 million expected (Bloomberg). April’s number included 331,000 in the battered leisure and hospitality sector.

With economic growth in overdrive, why did hiring miss by such a wide margin? April’s disappointing number belies the underlying strength in the economy.

Well, one day prior to the release of the report, the Wall Street Journal ran this story:

Millions Are Unemployed. Why Can’t Companies Find Workers?

Among the reasons potential workers are holding back: fear of getting Covid, lack of childcare, and enhanced unemployment benefits.

On the same day, a Bloomberg News headline read:

Companies Warn of U.S. Labor Shortages Economists Call Temporary

We see employment rising in the graphic below, but it remains well below the pre-pandemic level.

Also, note the significant decline in the labor force, which is defined as those who are working (part or full time) plus those out of work AND actively searching for work.

The labor force is 3.5 million below the prior peak. Those who might want to work but aren’t looking would not be counted in the labor force, as it is defined by the U.S. BLS.

Data Source: U.S. BLS, NBER April 2021. Shaded aress mark recessions.

“There is definitely a job paradox that’s going on,” said Joe Song, senior U.S. economist at Bank of America Corp. It’s difficult to quantify, “but it’s clearly a challenge that’s weighing on a quicker pace of recovery.”

Why might it be weighing on the pace of a quicker recovery?

In part, companies are struggling to find the workers they need. The National Federation of Independent Businesses pointed out in its March survey that “42% of owners reported job openings that could not be filled, a record high reading.”

Might April’s jobs report be a one-month aberration? We may see a resumption in faster growth in the months to come.

Or, could we be seeing economic imbalances developing from excess stimulus and the slower response from businesses and workers needed to meet strong demand?

In earnings calls and business surveys, executives often blame stimulus checks and generous unemployment benefits for hampering hiring efforts, Bloomberg News reported. But economists and policymakers are unclear about what’s really causing this gap and how long it may last.

Not enough workers is a ‘high-class problem’ versus what we experienced a year ago, but it’s hurdle for businesses that can’t fill open positions. It’s a big swing in the pendulum.