The great American job-creating machine, already in high gear, picked up in May, when the economy added 223,000 jobs-over 50,000 more than experts had predicted.
That news took second place to a 7:21 a.m. Trump tweet, “Looking forward to seeing the employment numbers at 8:30 this morning.” In fact, his economic adviser, Larry Kudlow, had called him on Air Force One the evening before to inform him of the blockbuster number. The president’s tweet was a clue that the numbers would be favorable. Advance release, even comment by a member of the executive branch until “at least one hour after the official release time” violates Office of Management and Budget Statistical Policy Directive No.3, which was designed to prevent insider share trading based on this information. “Lock him up,” a laughing Austan Goolsbee, former adviser to Barack Obama, chanted on CNBC.
Policy makers and pundits once waited with bated breath every first Friday of the month to learn whether there were enough jobs for all the men and women in the workforce. Now, with the unemployment rate at 3.8 percent, the lowest in 18 years, we wait to see whether there are enough workers to fill the available jobs.
Which brings us to the JOLTS: The Job Openings and Labor Turnover Survey reports that there are 6.6 million unfilled positions, the highest level since these data have been compiled.Which is why more and more workers are telling their employers to take this job and shove it. The quits rate-the portion of workers willing to quit their jobs in search of better ones-stood at only 1.3 percent during the recent recession. It now stands at 2.3 percent, a record high.
In short, America has a labor shortage. One property developer tells me he could build and sell more homes if he could find skilled roofers. A garden designer complained to me that she can’t find laborers. Trucking companies have rigs sitting idle for lack of drivers. City councils are offering bonuses to workers who relocate to their towns-persuade a friend to join you at your workplace and earn a bonus.
It is of course true that there remain what Ed Lazear, chairman of George W. Bush’s Council of Economic Advisers, estimates to be 1 million potential workers who remain outside the labor market. They might be persuaded to seek work if wages rise further or eligibility for entitlements is tightened. But for now, they are not answering employers’ call.
The economy seems to be as strong as the jobs market. Predictions vary, but all agree that the 2.2 percent GDP growth rate in the first quarter of the year was likely due to some reporting anomaly that has produced low estimates for that time of year. Analysts at Lazard Asset Management say the economy “is well positioned for further growth.” The non-profit Conference Board expects the economy to grow at an annual rate of 3.1 percent this quarter, and Macroeconomic Advisers is even cheerier, putting its bets on 3.6 percent. The OECD expects growth for the year as a whole to come in at “about 3 percent.”
Not all experts are as optimistic. But even those whose expectations for the year are more modest-the Federal Reserve Board (2.7 percent) and Goldman Sachs (2.6 percent)-anticipate what by the standards of recent years is considered a satisfactory performance.
With reason. Rising gas prices have been more than offset by modest increases in hourly wages (+2.7 percent, year-over-year) and by the increase in pay packets resulting from the Trump tax cuts. Result: consumer spending up in April. Business spending on plant and equipment has been surprisingly flat, but surveys suggest that plans to up those outlays are about to be executed. The chief financial officers of the nation’s listed firms, their wildest dreams of avarice almost satisfied by the 22 percent year-over-year increase in profits in the first quarter, expect to increase investment by over 11 percent during the next 12 months. And industrial output rose in April for the third consecutive month, bringing growth this year to 3.5 percent.
So why worry? Here’s why. For one thing, last year’s widely applauded synchronous expansion-virtually all advanced economies simultaneously growing at relatively rapid rates-is no more. European economies are growing at a rate of only about 1.6 percent, about half of that in 2017. China is easing monetary policy to cope with a slowdown. Japan’s economy is shrinking. Italy is doomed to perpetual high unemployment and nil growth so long as it remains entrapped in euroland, and might prove unable to service its enormous pile of IOUs. If so, the E.U. banking system that holds its debt might confront the day of reckoning it has so far avoided.
For another, some of America’s reasons for optimism make good headlines, but don’t survive closer scrutiny. The OECD and other high-end forecasts for the near-term reflect the effect of the Trump tax cuts, the impact of which might not prove enduring. Indeed, there is a real danger that the cuts will not generate the additional tax revenue that the administration predicts. If so, already-high deficits will rise, driving interest rates to recession-inducing levels.
Then there are the problems emerging in credit markets. Banks, eager to make new loans to boost their profits, are relaxing their credit standards in a competition for new borrowers. Credit-card and auto loans more than 90 days delinquent are on the rise. Regulators are issuing more warnings to banks to tighten standards than they did last year. A much-watched clue to the trust banks have in each other, the rate they charge each other for loans, is up. Corporate credit quality is down: within the highest-rated, investment-grade bonds, 48 percent are now rated BBB-, compared with only 25 percent in the 1990s. Last month the International Monetary Fund warned that “short-term risks to global financial stability have increased.”
Most important, the economy is bumping up against what economists call supply-side constraints, and might well be incapable of growing at a rate greater than 2 percent, if it can achieve even that. Not for the usual reason cited by neo-Keynesians-inadequate demand. Rather, in addition to too few skilled workers, employers are running into shortages of materials. Jamie Satchi, economist with data-gatherer MNI Indicators, reports that firms in the Chicago area not only “had difficulty finding adequate workers,” but that “order backlogs [are] surging and lead times on key materials [are] up sharply.”
So here’s the real worry: With demand rising, and supply unable to do so, the law of supply and demand tells us we are in for inflation. And higher interest rates. Neither central bankers, nor politicians, can repeal that law.