A relatively favorable interpretation of Friday’s U.S. jobs report is that reversible COVID-19 effects are temporarily undermining a strong and consistent economic recovery. A less favorable one is that the labor market is becoming more vulnerable to stagflationary winds. Unfortunately, the particularly noisy report does not allow for a firm conclusion. That may be good news for the Federal Reserve in the short term despite longer-term policy complications. The implications for Congress are less conflicting and call for more urgent action on physical and human investment.
Job creation in September amounted to 194,000, well below the median analyst forecast of 500,000. While the shortfall was offset by favorable revisions to earlier months amounting to 169,000, the overall outcome was still disappointing for an economy looking to maintain a strong and inclusive recovery.
Adding to the disappointment, labor force participation edged lower. At 61.6% for September, it remains well below the pre-pandemic level. Fortunately, those with jobs experienced both higher wages (now up 4.6% annually compared with 4.3% the previous month) and more hours worked. Meanwhile, the unemployment rate fell sharply to 4.8% from 5.2%, with a particularly strong drop in the unemployment rate for Black workers (to 7.9% from 8.8%).
One explanation for the puzzles and contradictions in the report is the delta variant of Covid. Under this scenario, the higher health risks associated with this more infectious variant have sidelined employable workers, thereby providing those who are working with greater opportunities for higher wages and more hours worked. And it’s not just risk aversion. Uncertainties about school and child care also play a role.
The alternative explanation is more worrisome because it points to a malfunctioning labor market. It’s a structurally oriented supply-side explanation that draws on the combination of a record level of vacancies, the decline in labor force participation and disappointing job creation. It suggests that matching workers to jobs is undermined by structural aspects such as skill mismatches, mobility challenges and lower propensity to work. It reinforces worries about stagflationary winds, especially when considered alongside persistent supply-chain shortages and transportation disruptions.
This jobs report cannot settle which explanation is more plausible at this stage. There is simply too much noise, from the inconsistencies between the household and establishment surveys to the strange seasonal adjustments in play. More data will be needed.
What is clear is that the report is a facilitator for the Fed in the short term, as illustrated by the immediate reactions of the stock and bond markets. The report opens the door wider for combining a November taper of the central bank’s monthly asset purchases with a stronger signal that such a policy action says nothing hawkish about subsequent rate increases.
But this short-term good news does not guarantee smooth sailing in the future, especially for a Fed that has so strongly adhered to its “transitory inflation” call despite mounting evidence to the contrary. It’s only a matter of time until markets start pricing this in more forcefully. Meanwhile, stagflationary winds, which are more a potential risk than a baseline reality now, could become a dominant force if the Fed makes a bigger policy mistake.
In contrast to the central bank, there is little if any policy complexity in the report for Congress. The supply issues facing the economy, of which the labor market is but one component, highlight the need to move quickly and decisively on both physical and human infrastructure to emerge from the pandemic with a robust, inclusive and sustainable economic recovery.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include “The Only Game in Town” and “When Markets Collide.”