Fed exec: Get ready for another “odd or unusual” jobs report

Hopefully, Dallas Fed chief Robert Kaplan just wants to perform some overzealous expectations-setting ahead of the May jobs report due on Friday. But … probably not, considering the fundamentals haven’t changed from April’s stunning bust. “All those tensions,” Kaplan told a tech conference, “they’re not actually going to go away even for the next jobs report.”

Joe Biden hardest hit? Politico thinks so:

Businesses say they can’t find enough workers to hire. The pace of Americans moving off the unemployment rolls is slowing. And a top Federal Reserve official is warning that job trends in May might look “odd.”

All of that suggests that the next monthly U.S. employment report, which will be released Friday morning, may not show the robust growth that President Joe Biden needs to help pass his sweeping agenda.

On the heels of April’s sluggish job growth, which shocked economic forecasters and sparked debate over a nationwide worker shortage, the May data will be closely watched for an indication of whether something significant is holding back the labor-market recovery — such as what Republicans say are overly generous federal unemployment benefits — or whether the previous data was nothing more than a one-month blip.

Democrats have downplayed the concerns, maintaining that the path back to full employment was always going to be winding and stacked with challenges. And economists are predicting the report will show 630,000 jobs were created in May, a robust number. But while Biden has been polling strongly on his handling of the economy, a second straight month of slower-than-expected job creation could embolden critics of his multitrillion-dollar infrastructure spending plans and raise fears that the labor market is facing a long road back to normal.

Even the 630K level would be a climbdown from the kind of growth we should see from the elimination of COVID-19 commerce restrictions. Economists predicted over a million jobs added for April, only to see 266K added instead. We are eight million filled jobs shy of the pre-pandemic level of employment in February 2020, 152.5 million compared to last month’s 144.3 million in seasonally adjusted figures. An addition of 630K, once the population-growth additions are extracted, would be a weak gain.

The big problem is the worker shortage, which current pandemic benefits incentivize. We still have over 12 million continuing pandemic-enhanced unemployment claims being paid, while over seven million job openings were left unfilled in April. Business owners are complaining about the lack of interest in jobs, which itself will end up being (a) inflationary in regard to prices and (b) recessionary in regard to growth as demand goes unmet. We are already seeing negative impacts on retail sales in the latest reports, which could end up eliminating the jobs before workers decide to fill them.

Nothing has changed in these incentives, so it’s easy to see why Kaplan wants people to adjust expectations accordingly:

“We think you’re going to see another odd or unusual report,” Kaplan said. “We know businesses are telling us they got plenty of demand, but they can’t find workers, either skilled or unskilled.”

The political question over the next jobs report is murkier than this easy prediction. One more bad report in a row might spur Congress to end the pandemic unemployment programs before their September expiration, but that seems less than a 50/50 proposition. Stalling metrics could also force Joe Biden to act, but so far he keeps insisting that the long-term track looks rosy — which it might, but could be better if we get those jobs filled now rather than risk killing demand. The most likely catalyst for an abrupt change would be a disappointing Q2 GDP report, but we won’t see that for almost two months. We’d get at least one more monthly jobs report before that prompts Congress into action, and by that time we’d be almost at the end of those programs anyway.

The likeliest outcome is “odd or unusual reports” all the way down to October. Adjust your expectations accordingly.

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