MainStreet Macro: The Big Three

While you were worrying about labor, supply chains, and inflation, you might have missed the news that U.S. economic growth slowed from July through September to just 2%. That’s below even the tortoise-like pace that defined growth in the decade before the pandemic. It’s also a far cry from the sonic 6.7% growth we saw in the second quarter of this year.

The delta-variant was behind the economic downshift, as another uptick in cases limited our rebound. Now, with viral outbreaks re-contained, the outlook for GDP in the final three months of 2021 will hinge on Main Street’s ability to navigate the big three: Hiring bottlenecks, inflation, and supply shortages.

Hiring bottlenecks

Last week, government data showed that the jobs market rebounded in October from a two-month slump caused by the delta variant. The economy created more than 600,000 private-sector jobs and hiring was widespread across goods-producing companies and the service sector.

Strong gains, to be sure, but the numbers still don’t add up. The U.S. still has 4.2 million fewer workers than it did pre-pandemic. That’s even though job openings for August hit 10.4 million, just shy of an 11 million record set the month before.

Plenty of available jobs and plenty of available workers adds up to plenty of hiring, right? Not exactly.

Labor shortages are among Main Street’s most common business complaints. Labor force participation still is 1.7 percentage points below where it was before the pandemic. Even as employers impatiently tapped their feet waiting to make hires, workers weren’t rushing to apply.

But things are changing. The delta variant is coming under control and young children now have access to the vaccine (sigh of relief heard from parents across the country).

If October is any indication, Main Street will continue to see job gains in coming months.

Consumer spending drives growth in the short term. What drives the economy in the long run is a growing and more productive workforce. Business investment can help drive productivity by automating certain job functions.  But to grow the workforce we need people to be lured back to work.

Inflation

If “unprecedented” was the most overused word in 2020 to describe the pandemic, “transitory” has to be the most overused word in 2021 to describe inflation.

Back before the pandemic, the slow and steady pace of price growth meant the Fed could keep interest rates low. Now the Fed is staring down a future in which it might have to raise rates to slow inflation just as economic growth starts to peter out.

The Fed raised interest rates amid a slowdown in growth in the 1970s. Modern monetary policy frowns on that sort of approach now, but it’s where we could end up if high inflation sticks around.

For a year, the Fed’s refrain has been that once the effects of the pandemic recede, price growth will slow. 

Main Street, take note. That doesn’t mean prices will fall back to pre-pandemic levels. It means only that they won’t rise as fast.

“Transitory” is an amorphous word. Does it mean three months? Six months? A year or more? No one really knows, because a key cause of inflation — the pandemic — is unprecedented, as are our current shortages.

Which brings us to our third problem.

Supply Shortages

I won’t spend a lot of time discussing supply shortages because we’ve recently written about it here.  One thing I’d add is that a big reason growth slowed so much in the third quarter is that there wasn’t enough stuff, mainly cars and trucks, available for people to buy.

There are plenty of ways an economist can be helpful, but Main Street sees a lot of things for itself and doesn’t need someone like me to tell them what’s going on. Bare store shelves are one of those things.  

The fact that many of us will soon be shopping for the holidays will bring home the fact there are fewer goods in stores and online than we’d like. 

My Take

The economy has come a long way since the depth of last year’s downturn. But a lot of the growth can be attributed to unprecedented monetary and fiscal support. Now the Fed is withdrawing some of that monetary support and congressional purse strings spent directly on households have tightened.

The infrastructure bill passed by the House last week, could boost growth, but it’s main impact will mostly land years, as opposed to months, in the future.

That means that in the final three months of the year, Main Street will need to navigate the big three of hiring bottlenecks, inflation and supply shortages with less government aid than it had in the earlier days of the pandemic.

The good news is Covid-19 cases are going down, with the seven-day moving average dropping 33% last week from a month earlier. A final retreat of the pandemic would be the best way to end the year.