And yet, the fortunes of US workers have arguably improved more in recent months than they have all year. Gradual normalization due to pandemics and supply chain disruptions is benefiting both employers and workers. Think of it as a one-time productivity dividend as the economy becomes more efficient. This time last year we saw strong nominal growth while inflation-adjusted growth was weak; Now things are going in the opposite direction.
To get an idea of this, look at real average weekly earnings, which take into account both nominal wage growth and inflation. When the pandemic first struck, there was a boom, partly due to compositional issues with the index: many of the jobs lost during the pandemic were low-paid, such as in retail and hospitality. So those who remained employed had higher average wages than in the pre-pandemic universe. When these lower-paid workers were rehired, the average fell.
The more important real income story in 2022 was more about the relationship between inflation and wage growth than the composition of employment growth. Headline inflation, as measured by the consumer price index, rose by 5.4% in the first half of the year, or 11.1% on an annualized basis. Although job growth has been robust – good news for people who have been out of work or re-entering the labor market – wage growth has not been able to keep up with this level of inflation, leaving the typical worker behind. This explains some of the “vibecession” feelings people felt as gas prices soared to $5 a gallon.
The labor market has slowed since then, but headline inflation has slowed even further. The CPI rose just 1.0% over the past five months, or 2.4% on an annualized basis, as supply chain normalization led to falling prices for goods like used cars and gasoline prices fell significantly. The rental market is also cooling off quickly, which is not yet reflected in the CPI data.
So now we’re at a stage where Wall Street is pointing to the slowing labor market as evidence of heightened risks of a recession into 2023. Meanwhile, real incomes are growing well again and consumption is also accelerating, leading the Atlanta Fed tracker to suggest real GDP growth could top 3% this quarter.
We normally view real economic growth as a function of employment growth and productivity growth. What we are witnessing now – supply chains recovering, corporate labor demand falling and workers taking advantage of lower prices and increasing their inflation-adjusted wages – could be termed productivity growth.
But it’s better to think of it as a one-time efficiency dividend that will benefit businesses, workers and consumers alike as many of the disruptions and price spikes of the last 2 1/2 years subside. Gasoline prices are lower, used cars are more widely available, the pace of rent increases is slowing, freight costs have come down, delivery times have shortened and store shelves are generally well stocked. Financial markets are reacting to a few months of weaker inflation data by bidding up both stocks and bonds, which should help the housing market marginally. That’s good news for almost everyone (not so great if you’re a used car dealer, ship owner, or rental company).
And there is still room for improvement. Rents are likely to fall further during the seasonally slower winter months and auto production should accelerate, boosting economic growth and putting further downward pressure on vehicle prices and inflation.
With wages once again outpacing inflation, Americans can either increase their savings rate, which has been somewhat low in recent months, or boost spending even more, which should keep recession fears at bay for a while longer.
But the key point is that while nominal growth may be slowing, inflation-adjusted growth is picking up as the economy slowly returns to normal after the many disruptions that wreaked havoc during the pandemic. So, although the job market is weaker, workers are in better shape.
More from other authors at Bloomberg Opinion:
• Don’t get too excited about an inflation report: John Authers
• CPI justifies market exuberance this time: Jonathan Levin
• Oil falls and battery prices rise: Elements by Liam Denning
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Conor Sen is a columnist for the Bloomberg Opinion. He is the founder of Peachtree Creek Investments and may have interests in the areas he writes about.
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