ECONOMY WATCH
As the post-pandemic U.S. economy advances, retreats, then advances again, a common question is: what does this new, new normal look like?
This Economy Watch feature briefly documents changes in America’s economy now underway. With this update, starting with the big surprise … declining U.S. workplace productivity. This is followed by updated data covering economic indicators related to inflation, employment change, and labor force participation.
Productivity Build Dips
As illustrated by the following graph, from 2012 through the 2nd quarter of 2024, U.S. labor productivity has increased at an average rate of 1.4% per year. Just prior to the pandemic, labor output per hour peaked at an BLS-calculated increase of 3.4% year-over-year as of the 4th quarter of 2019. Less than a year later, calculated productivity spiked to an annual increase of 6.8% as of the pandemic affected 3rd quarter of 2020.
In 2022, productivity plummeted into negative territory extending through the 1st quarter of 2023. Finally as of the 2023 Q2, year-over-year productivity was back into positive territory — at +1.3%. Productivity gains continued through to a new peakof 2.9% as of the 2024 Q1 — well above the long-term productivity gain averaging 1.4% per year (extending back to 2012). However, this most recent 2024 Q2 period shows some slackening, dropping to a 2.7% annual increase.
Note: BLS calculates U.S. labor productivity in two ways. The method illustrated above compares the % change in labor force productivity as of a specified year divided by the productivity index for the same quarter one year earlier.
What gives? With the pandemic, productivity as recorded by BLS surged for reasons including extraordinary federal funding support for workers and businesses (on a temporarily reduced base of employed workers).
Subsequently with the pandemic receding in the rear-view mirror, reported productivity nosedived to the negative — to a low of a negative 2.4% year-over-year (decline) as of the 2nd quarter of 2022. Finally, labor force productivity went to the positive a year later as of the 2nd quarter of 2023, further up as of the early 2024 Q1 — before again weakening this most recent Q2 period..
Factors affecting weakened productivity likely have included experienced baby boomers retiring, supply chain bottlenecks and unprecedented reshaping of American attitudes and values placed on work versus other quality of life considerations. Headline supply-side issues range from a nationwide mismatch of workers relative to skills required — together with generationally unprecedented inflation that likely can not be fully resolved prior to addressing the workplace productivity challenge now and over the decade ahead.
The composition of employment change also has affected the productivity calculations. With early phase pandemic recovery, much of the re-hiring was re-focused on lower paid/lower productivity front-line retail and hospitality workers.
Now as of the first half of 2024, re-hiring appears to be shifting more toward higher paid workers — though more dependent on job growth in health care and government. The pace of productivity uptake, still while high, is slowing. Going forward, continued progress toward ever increasing productivity with existing and new workers can go a long way to reducing upward inflation pressure.
Beating INFLATION
This past year, annual CPI inflation has bounced in a range of just under 3% to less than 4% on an annualized basis. As of August 2024, the monthly year-over-year inflation rate comes in at just 2.53%the lowest rate of annual price increase since February 2021.
Even better, the most recent month-to-month change was a minus 0.36% — actually indicating a drop in prices and of course well below the Federal Reserve’s target of 2%. Look for a rate cut in September, hopefully in time and of sufficient magnitude to avoid slipping into recession.
Looking back to the COVID experience, the combination of public sector stimulus and unexpectedly rapid resurgence of consumer demand — even amid the pandemic and then Ukrainian war — has been accompanied by energy, supply chain and labor shortages. CPI inflation peaked at over 9% in June 2022 which the Federal Reserve attacked via monetary tightening with ever higher interest rates. Since then, the CPI trend has been downward and now seemingly stabilized at an annualized inflation rate at between 2-3%.
Demand-side drivers of inflation including pre-2022 historically low interest rates have been addressed, in part, by increased Fed fund rates. Excessive and inflationary federal stimulus funding has proven more difficult to productively remedy — with resulting stubbornness of further CPI reduction.
Addressing potentially persistent supply-side drivers necessitates longer-term attention to sustained labor force participation and moderated wage increases - with even more emphasis on improved workplace productivity going forward. And nation-wide employment remains below what is suggested by the pre-pandemic trend (as described below).
JOb Growth stalls out
after a good run
From January 2012 through October 2024, U.S. employment has increased by 19.3% — with 159.0 million non-farm jobs nationwide as of this most recent month. For the month of October just passed, the U.S. added only 12,000 net new jobs (seasonally adjusted). This is the poorest job growth performance since December 2020, in part due to a Boeing machinists strike now settled. However, October’s performance also represents a further indicator in recent months of a weakening U.S. economy.
Total seasonally adjusted non-farm employment is now 4.4% above pre-pandemic job estimates. However, as illustrated by the above graph, U.S. employment is about 4.3 million jobs below the longer-term trend-line suggested by the pre-pandemic experience of 2012 to early 2020. After rapid catch up in the immediate aftermath of the pandemic, closing the remaining gap is now proving to be more elusive — as the gap between trend and actual has widened from a 3.9 million job deficiency in July to the 4.3 million gap indicated as of this October.
From the perspective of the nation’s Federal Reserve, the latest news is the most pertinent indicator yet that hiring is slowing significantly, thereby reducing inflationary pressure. This reinforces the case for further interest rate reduction that the Fed is considering now as of November — as needed to get employment growth back on track.
LABOR FORCE PARTICIPATION
In the early phases of economic recovery from the COVID-19 pandemic, attention shifted to workforce participation as a significant indicator of U.S. economic potential and constraints with a new, new normal. The nearly overnight reduction in participation rates experienced initially with the pandemic has been followed by a long, slow slog back to near return to pre-pandemic participation.
Remarkably, the seasonally unadjusted rate of 63.2% for July 2024 peaked as the highest rate recorded since February 2020. The not-so-good news is that participation as of October has dropped back to 62.6% — both in terms seasonally adjusted and unadjusted rates. This change comes as reinvigorated labor force participation is now running into a down-shifting of U.S. hiring activity.
From February to April 2020, 25.5 million Americans saw their jobs disappear — a figure encompassing non-farm, self employed and gig workers. Over the same time period, the nation’s labor force declined by a figure approaching 8.2 million workers — accounting for 32% of the initial net pandemic job loss. In effect, seasonally adjusted labor force participation dropped from 63.3% to 60.1% of adults age 16+ in the space of two months (including individuals either not qualifying or otherwise not applying for unemployment benefits).
Looking back over the full pandemic and then continuing recovery, a range of reasons have been cited and debated as contributing to weakened work force participation — including accelerated baby boomer retirements, smaller cohort of Gen Z new work participants, child care concerns, mismatch of worker skills vis-a-vis employer needs, residual fear of COVID workplace exposure, lack of jobs with full 40-hour schedules, legacy of COVID-period governmental income support, changing personal lifestyle expectations, and the recent ravages of inflation coupled now with hiring cutbacks and layoffs.
Looking ahead, in-depth analysis by E. D. Hovee indicates that even if participation rates continue to to recover to at or above levels as experienced a decade ago, only 25-30% of the current labor shortage could be addressed nationwide. The U.S. economy can expect prolonged workforce supply shortages over the course of this decade — due primarily to demographics of an aging (and retiring) workforce. Looking beyond labor force participation, boosting productivity is likely an even more critical factor necessary to bring demand and supply back into better balance. For more detail, click to my September 22, 2022 blog post titled:
Labor Force Deep Dive
Added Note: This data is from a monthly Current Population Survey (CPS) conducted by the U.S. Bureau of Labor Statistics (BLS). The data is somewhat at variance with a separate Current Employment Statistics (CES) survey of employers. CPS data is collected for workers age 16+ but includes farm, self-employed and gig workers. CES data is age unrestricted but is limited to non-farm employment and excludes self-employed.
