Written for Bolton by Zack Fritz, Sage Policy Group, Inc.
The past month has seen both short- and long-term economic forecasts revised lower. The Federal Reserve Board lowered their projection for 2022 GDP growth to a 1.7% annual rate, down from a projection of 2.8% in March, and they issued similar downgrades to the outlook for 2023 and 2024.
This is largely due to the persistence of inflation, much of which is attributable to factors outside of the Fed’s control. The Russian invasion of Ukraine has driven energy and food prices higher, and China’s zero-covid policy continues to add pressure to supply chains. As a result, the Fed now intends to raise the federal funds rate to 3.8% by the end of 2023, well above the previous projection of 2.8%.
While inflation, which remains at roughly a 40-year high, is the most critical issue facing the economy, other headwinds will frustrate growth in the coming years. The pandemic, for instance, initiated severe and widespread labor shortages. As of April 2022, there were 11.4 million open, unfilled jobs, about 4.4 million more than at the start of the pandemic. That equates to 7% of all jobs; for context, prior to 2021 the job opening rate had never been above 4.8%.
This glut of unfilled jobs is especially concerning in the context of the 3.6% unemployment rate, which is lower than at any point between 1970 and 2019. In April, there were two unfilled jobs for every unemployed worker, an all-time low.
This has put significant upward pressure on wage growth, especially in the segments most affected by labor scarcity. Wages for restaurant employees have risen about 17% since the start of the pandemic, a significantly faster rate of increase than for employees of all industries (12%) and overall inflation (13%). This wage growth will persist as long as workers enjoy such unprecedented bargaining power; 2.9% of all workers quit their job in April, just below the all-time high established in December 2021.
Labor shortages are largely due to demographics. The fertility rate has fallen steadily over the past several decades, and the pandemic suppressed immigration levels. Baby Boomers retired en masse during 2020 and 2021, and while some have unretired in recent months due to the rising cost of living, that won’t help in the long-term.
Looking at the short-term, recession appears increasingly likely. GDP contracted in the first quarter of 2022, and some forecasters now predict that growth will also turn out to have been negative in the second quarter. The New York Federal Reserve now predicts that there’s only a 10% chance of a “soft landing,” meaning that there’s a 90% chance that four-quarter GDP growth turns negative during one of the next ten quarters.
There remains some reason for optimism, however. The economy continues to add jobs at a record clip. Since January 2021, there’s been at least 390,000 net new jobs every month. The economy added more than 390,000 jobs just twice from 2001 to 2019. Consumer spending has also held up remarkably well in the face of inflation despite an unexpected dip in retail sales last month. While a soft-landing is increasingly unlikely, if it happens, thank the persistently strong U.S. consumer.