As anyone who has ever pigged out on chocolate fudge can attest, it is possible to have too much of a good thing.
Lately, as the May jobs report released on Friday shows, we’ve had these good things in spades.
We have now nearly filled in the deep jobs hole created by the pandemic. If May’s pace of employment growth (390,000 jobs added) continues, we’ll be back to the pre-pandemic level of employment in another two months or so. That would be much sooner than (nearly) anyone predicted.
Again, a good thing! Especially compared to the painfully slow recovery after the Great Recession.
While we want a hot economy, and a hot labor market, there is also such a thing as “overheating.”
This could happen, say, because consumers have tons of cash to spend, and want to spend it (again, usually good things) – but suppliers can’t keep pace with customers’ super-strong demand for goods and services. They don’t have the capacity to scale up quickly enough. That mismatch can lead to rapidly rising prices and shortages of products. It can also manifest through shortages of workers, if businesses are trying so hard to scale up that they want to hire more people than are able or willing to work.
That has been the case for about the past year: Since May 2021, there have been more job vacancies posted at the end of each month than there were idle workers actively looking for jobs. In April 2022, the most recent month of data, there were about twice as many job openings as there were unemployed workers.
So even if every single unemployed worker suddenly got a job, there would still be tons of positions going begging.
One risk in a situation like this is a wage-price spiral. This occurs when companies chasing scarce workers decide to raise wages (again, usually good), but the resulting higher labor costs cause the companies to raise the prices they charge their customers. That, in turn, prompts workers – who, of course, are also consumers – to demand even bigger raises, which causes more price increases, and so on.
There has been some debate about whether we could be headed toward (or are already in) one of these dreaded spirals. There has also been debate over whether the Federal Reserve needs to act more aggressively to break or prevent such a cycle – specifically, by raising interest rates much more sharply than it already is doing.
That would have the effect of making it more expensive to borrow, which puts a damper on spending; but, historically, it has also usually led to a recession.
In April, Fed Chair Jerome H. Powell referred to to the labor market as “too hot. It’s unsustainably hot. ” He added that “It’s our job to get it to a better place where supply and demand are closer together.”
But that doesn’t mean he wants hiring or economic growth to come to a halt, obviously, or for the economy to crash. What he and other policymakers have been looking for – what could help them avoid having to raise interest rates more drastically – is sometimes called the “Goldilocks” economy: not too hot, not too cold. Just warm enough. Just right.
Powell and others have acknowledged that getting and staying on that “just right” path would be challenging. But at least based on the jobs report released on Friday, there is reason for optimism.
The report showed that job growth was strong, but a little bit slower than it was in April. Wages (at least in nominal, pre-inflation terms) are growing, but they’re not accelerating – if anything, they have slowed a touch. The report was “good but not gangbusters,” as Politico aptly put it.
Even more encouraging, more Americans who had previously been sitting on the sidelines entered the labor force in May.
This hopefully means that vacancies can get filled more quickly. Which, in turn, means companies can scale up production – whether of household appliances, construction materials, restaurant meals or anything else – to accommodate continued demand from customers.
To be sure, this is one month of data. There are still a lot of risks for the economy in the year or so ahead. These are driven by a combination of unlucky shocks (war and its resulting disruptions to energy and food markets; pandemic variants and related factory lockdowns; avian flu; drought; who knows what else) – as well as the (still unknown) ability of the central bank to nimbly calibrate its response. Raising rates just enough, but not too much.
A few more Goldilocks reports like May’s would certainly be welcome.