After taking extraordinary measures to counter the impact of the pandemic, the Fed can reasonably claim “mission accomplished” as it relates to the full employment component of its dual mandate. The March report showed employers added 431,000 jobs while the unemployment rate dipped to 3.6% from 3.8% the prior month. This was only slightly higher than 3.5% registered in February 2020, representing a 50-year low.
Job gains were also revised higher for the first two months of this year. Employment has rebounded sharply, with the economy now possessing just 1.2 million fewer jobs than in February 2020, a far cry from 21.6 million fewer jobs at the trough two years ago.
Labor force participation continues to run below pre-pandemic levels but is recovering. In March it inched up to 62.4% versus a recent low of 60.2% in April 2020. There are multiple drivers leading individuals to rejoin the workforce including declining household savings, as well as lower Covid cases, allowing workers who were home with children during school or caring for sick family members to return to the workforce. It would be helpful if this trend continues given there are currently more job openings than unemployed workers. Also reflective of the tight labor market, workers are quitting their jobs at near record rates, often for better opportunities. Fed Chair Powell has even expressed concern that the job market may be overheating, feeding higher inflation. Average hourly earnings grew 5.6% in March from the prior year, though this remains below most measures of inflation.
The progress made on the jobs front leads to the second directive under the Fed’s dual mandate, price stability. The Fed pivoted from its “transitory” stance regarding elevated inflation late last year, and as 2022 has progressed its concerns regarding inflation, have seemingly only increased. In March, consumer prices grew at their fastest pace since 1981, up 8.5% compared with the prior year. A portion of the increase can be attributed to energy prices that surged following Russia’s invasion of Ukraine. Energy prices in March were up 32% versus a year ago while groceries increased 10%. Excluding volatile food and energy prices, “core” inflation grew 6.5%, slightly below expectations but still the highest core measure in nearly 40-years.
The pandemic-related supply chain disruptions that were once expected to self-correct in a relatively timely manner have persisted, leading to higher prices that have proven sticky. There are other factors exerting upward pressure on prices as well. Russia’s invasion of Ukraine added a commodity supply shock, reflected by the surge in energy prices, along with further constraints on the supply chain that don’t appear likely to ease in the near term. Furthermore, the pandemic exposed supply chain vulnerabilities and set off a trend toward onshoring as companies attempt to secure more dependable supply. This shift represents the reversal of a multi-decade trend of moving production offshore in an attempt to lower costs. Consumers in turn benefitted from lower prices, reflected by inflation that ran just 2.4% annually from 1990-2019 according to the consumer-price index. The shift toward onshoring will unwind some of this benefit and put upward pressure on prices in coming years, implying inflation going forward may be something other than cyclical. A survey recently released by the Fed’s New York branch showed consumers anticipated inflation hitting 6.6% over the next year with expectations over three years at 3.7%. Both are well ahead of the Fed’s 2% inflation target.
Reprinted from the May 2022 issue of the Investor Advisory Service stock newsletter, rated #1 for performance in 2021 by Hulbert Ratings.
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