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Lots of economists, including many at the Fed, think the economy is well beyond full-employment. The current 3.4% Urate is well below the full-employment Urate of 4% or higher. Unemployment must increase a lot (aka recession) to quell wage growth and inflation. I don’t think so.
The job market is tight, but it’s not operating beyond full-employment. The Urate is a bit lower than it was before the pandemic, when inflation was too low. And the employment-to-population ratio, my go to measure of job market slack, is consistent with full-employment, no more.
Most telling is wage growth, which is definitively slowing. All of the wage # from average hourly earnings to the employment cost index show this. It’s tough (impossible) to square the view that the economy is operating well beyond full-employment with the weaker wage growth.
Behind the easing in wage growth is moderating inflation expectations. They took off with Russia’s invasion and the surge in oil prices. Nothing impacts expectations more than the cost of a gallon of gas. Now that gas prices have receded, so too are expectations and wage growth.
If my diagnosis is correct, then just as long as oil prices don’t jump again (yes, a risk), wage and price pressures should continue to abate without much higher unemployment. The Fed should be able to soon end its rate hikes and the economy should be able to avoid recession.
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Derek Thompson @DerekThompson
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Feb 5, 2023
Good thread on the possibility of a soft landing for the economy. The big question was whether we could get low unemployment, slowing wage growth, moderating core inflation, and stabilized lower energy prices, all at once. Fingers crossed: for now, we’re getting it.