Labor Market Remains Top Factor in Fed Decision Making
Economic growth is way up, but labor shortages persist.
What the Fed does with interest rates this year will have a “profound effect” on the economy, commercial real estate space demand, financial markets and capital markets — and the labor market remains one of the top factors in the Fed’s decisionmaking, according to Marcus & Millichap’s John Chang.
“Basically the employment market remains airtight and wages have been growing at an annual rate of nearly 5%,” Chang notes. “That’s about double the normal rate of wage growth and it’s a key inflation element being cited as a problem by the Fed.”
Unemployment has been running north of 3.5% since March of last year, and nearly 10.5 million jobs remain open. And while some sectors are beginning to soften, that’s not true for all businesses: hospitality still faces a major shortfall, as does healthcare.
To determine why such shortages persist, Chang looks in part to economic growth: the US economy, he says, is now about $4 trillion bigger than its pre-pandemic levels. That’s roughly the equivalent of the entire German economy. And what’s more, we’ve “fully” recouped the pandemic-era job losses plus about 1.2 million more people are employed today then pre-COVID.
The biggest labor losses fall into two groups, he says: Baby Boomers who retired at the onset of the pandemic and likely won’t return, and people who chose to stay home to care for others. And the effect of those labor force dropouts has been compounded by a sharp contraction immigration to the United States between 2017 and 2020.
In the end, according to Chang, the labor shortage can only be solved in three ways: by using technology and innovation (think robotic food delivery options), by finding more labor (possibly through immigration, which is way down post-Covid), or by shrinking the economy and causing a recession.
“The problem is the Federal Reserve can’t create new technology of automation. They also can’t increase the size of the labor force,” Chang says. “But they can shrink the economy. The question will be whether they do it, either on purpose or on accident.”
The Fed’s next rate announcement is expected on February 1.