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Tags: jobs data | u.s. economy | inflation | recession | federal reserve | biden | taxes

Michael Busler: Strong July Jobs Report Points to Mild Recession

Michael Busler: Strong July Jobs Report Points to Mild Recession
New York Times Square subway station at rush hour (Dreamstime)

Michael Busler By Friday, 05 August 2022 01:00 PM EDT Current | Bio | Archive

The Bureau of Labor Statistics just reported a whopping 528,000 new jobs were added in July. That brings the unemployment rate down to 3.5%. It also means that the total number of employed Americans is finally as high as before the pandemic. This is definitely good news.

The increase in employment was broad based in that 388 of the 389 metro areas saw an increase in the number of employed Americans. While the decrease in total demand seen in the last six months means the economy has entered recession, firms have not cut back on hiring yet.

Normally when output declines and a recession starts, business will reduce the number of workers they hire. That means the newly unemployed workers suffer a reduction in income and the economy, overall, contracts and these unemployed reducte their consumption. That reduces demand further and makes the recession worse.

Employers Use Current Resources

During the current recession, most firms are not reducing staff. Rather, they are simply eliminating the job openings that they have not been able to fill since the pandemic started.

In other words, suppose a small business needs 10 workers to operate efficiently. The company has been employing nine workers for the past year, mostly because they have been unable to find any new workers. They've had a job opening for more than a year.

Now, as the economy slows, the business owner does not lay off a worker. Rather, the job opening for the 10th worker is withdrawn and the firm is happy to have just nine people employed. The mild recession we are apt to see in 2022-23 means a sharp reduction in job openings with only a slight increase in unemployment.

As long as the recession remains mild, unemployment will not increase as much as it has in prior recessions. However, proposed monetary and fiscal policy may worsen the economic picture. The Fed at this point is locked into its hawkisk position and will have to maintain its very aggressive interest rate increase policy, mostly because it was so late to react to the current inflation.

Instead of trying to convince the public that the high inflation experienced in early 2021 was temporary, the Fed should have started to gradually raise interest rates back in March 2021. Since it waited a full year to act, inflation soared and is now approaching double-digit levels. Fed officials now say that they made a mistake and must move aggressively to reduce inflation.

That means the Fed will raise rates another 1% to 1-1/2% by year-end.

With the total number of employed workers increasing and total output decreasing, it means that the newly hired workers are not contributing to the production process. Last quarter productivity declined by 7.5%.

It is difficult to determine exactly why those newly hired workers are so unproductive, but if that can change and productivity return to the more normal positive rate of 2%, both the recession and inflation problems can start to be solved.

When productivity increases, total output increases, which grows the economy resulting in positive growth in gross domestic product (GDP). Also with a productivity increase, the output increase puts downward pressure on prices to help reduce inflation.

At a Critical Juncture

The next three to six months will be very critical to the short-term future for the economy. If the Fed gets too aggressive, the recession will worsen. If the Fed is not aggressive enough, inflation will soar. Federal Reserve Chairman Jerome Powell and the Board of Governors are trying to find the right combination that results in a “soft landing.” This is extremely difficult.

At the same time, the Biden administration is poised to pass another nearly $435 billion in spending via the Inflation Reduction Act in addition to the $280 billion chips bill passed last month. This will add more than $700 billion in new spending, which increases demand and is — once again, like the COVID stimulus spending — highly inflationary.

President Biden says the bill will reduce the deficit, meaning tax revenue will increase by more than $700 billion. Raising taxes that much when the economy is experiencing stagflation (stagnant economy with high inflation) will only worsen the problems the nation faces.

Biden also wants to increase taxes on corporations and high-income earners. That reduces capital formation and tends to slow growth, causing the recession to last longer and inflation to worsen.

The good news is that employment is strong, meaning the recession should be mild. The bad news is that additional government spending and tax increases will worsen the stagflation problem. And the Fed’s tight money policy, geared to reduce inflation, will tend to slow economic growth.

Let’s see what happens.
_______________
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

© 2022 Newsmax Finance. All rights reserved.


MichaelBusler
The Bureau of Labor Statistics just reported a whopping 528,000 new jobs were added in July. That brings the unemployment rate down to 3.5%. It also means that the total number of employed Americans is finally as high as before the pandemic. This is definitely good news.
jobs data, u.s. economy, inflation, recession, federal reserve, biden, taxes, inflation reduction act
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2022-00-05
Friday, 05 August 2022 01:00 PM
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