The Economy Really is Doing a Bit Better—So Let’s Not Ruin It
People are excited by recent good news on the economy—especially the 321,000 jobs created in November and the 5.0 percent (annualized) growth rate posted by gross domestic product (GDP) in the third quarter of this year. The excitement is understandable—this is genuinely good news. Yet we shouldn’t lose sight of how far away from a healthy economy we remain. We’re climbing more rapidly out of the hole that the Great Recession left us in, but we’re still really only halfway there.
You can see this measured in terms of how many jobs we need to restore the labor market health that prevailed immediately before the Great Recession began, or in the share of “prime-age” adults (ages 25-54) that have jobs.
And in terms of restoring average wage growth we’re not even halfway there. In fact, we’re still essentially nowhere yet.
All of this makes one twist on the commentary about recent good news really odd—the idea that there may be a dark cloud to the silver lining if it makes the Fed raise interest rates sooner and slow recovery. This perspective shows just how strange an economic world we’re living in.
Yes, we’re now growing relatively fast, both on the GDP and jobs side. But that’s what’s supposed to happen following recessions: you have to re-absorb the workers who were laid-off during the recession as well as provide jobs for the normal inflow of potential workers into the labor force. What’s been remarkable in the recovery since the Great Recession so far is that this above-trend growth really never happened. Moreover, there’s nothing in a period of above-trend growth following a recession that argues the Fed must spring into action to stomp on it.
The entire rationale for the Fed ever raising rates to slow recovery is that tight labor markets (i.e., too much job-growth) will drive unemployment so low that wages will start rising significantly faster than the sum of productivity and the Fed’s inflation-target, and that these rising wage costs will thus push up price inflation above the Fed’s comfort zone. But wage growth since the recovery has been so far below productivity and the Fed’s inflation target that there’s no real danger of this.
And the same third-quarter GDP data that has people excited about the economy but also thinking that the Fed might (or should) raise interest rates to restrain growth in the name of avoiding inflation also reported that the Fed’s preferred inflation metric (the “market-based” deflator for personal consumption expenditures, excluding food and energy, for the interested) rose only 1.3 percent over the last year (well below the Fed’s 2 percent average target)—and it even decelerated in the third quarter.
It’s understandable that people are frustrated with the slow pace of recovery and are looking for hopeful signs. And recent data really is moderately hopeful. But it’s really not understandable why so many economic observers are determined to find reasons for the Fed to raise rates sooner rather than later.