Economists: The future of our economy may be determined by the labor market, inflation

Fighting inflation: Combating a wage-price spiral could trigger a recession

RALEIGH – The future of the state’s economy was the topic of a virtual forum hosted today by the North Carolina Chamber of Commerce and the North Carolina Bankers Association.

Following yet another year of uncertainty and economic shifts, according to Sepi Saidi, Founder, President, and CEO of SEPI Engineering & Construction, and chair of the North Carolina Chamber of Commerce, who opened the virtual event by noting “we have our challenges to address and our questions to answer” in the year to come.

Top of mind for a panel of economists: inflation and the labor market.

Inflation: Possible peak of 4.5%, then slowing by end of 2023

“Our thinking here is that we are getting close to the peak in inflation,” said Eugene Flood, Managing Partner, Next Sector Capital.  “We think that we are, bottom line, in the first or second quarter of this year, looking at the key measures that the Fed looks at, core personal consumption expenditures, we think we are going to peak out in the United States at about 4.5% or somewhere in there.”

“A lot of the increases, the rate of increase, is transitory,” said Flood.  “There will certainly be some things that move up, that will be sticky, but we’re talking about what things will keep moving up.”

Much of the discussion at the Federal Reserve has been centered on transitory inflation,” said Laura Ullrich, Regional Economist, Federal Reserve Bank of Richmond.  “That might be temporary, or those that may last longer,” she noted.

There are some occurrences in the market that are likely to be temporary, such as rental car rates, explained Ullrich.  The inflation in that market is due in large part to factors due to the onset of the global pandemic, and will be temporary.

But for other items, and in other areas of the economy, once an increase occurs, it’s difficult to go back, she noted.

“Wages, rents, once those go up, it’s hard to go back,” said Ullrich.  “Those price increases are likely to be stickier.”

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“By the end of 2023, we will be back down to about 2%, which is the target that the Fed is shooting for,” said Flood.  “We think that most of this transition will happen in this current year, or in the next 12-15 months,” he added.  “If we’re right.”

As U.S. economy added lower than expected jobs, participation rate remained flat

The United States economy added 199,000 jobs, according to the latest figures from the Labor Department, which were released on Friday.

Further, the economists on the Economic Forecast Forum panel noted, the labor force participation rate remained stagnant.

That’s occurring even as thousands of jobs remain unfilled, and as companies have increased starting wages or added hiring bonuses in an effort to attract workers.

“My view as an economist is that we won’t see very much of an increase in the labor force participation rate,” said Ullrich.  “With baby boomers retiring, we’ve known that this generation would be retiring, but they’re retiring faster than expected.”

One reason, noted Ullrich, is that for these workers, their retirement portfolios have likely performed very well in the prior decade, and in the last 18 months, due to a soaring stock market.  Or, said Ullrich, perhaps automation is a contributing factor.

Economy adds only 199,000 jobs in Dec. – lowest increase in 2021

But it’s not just folks who are retiring who have left the labor force, said Harry Davis, an economist with the North Carolina Bankers Association.

“Nurses, childcare workers,” said Davis.  “So frustrated, and they’ve left the labor force, and I’m not sure they will be returning.”

Take childcare workers, said Davis.

“They’re leaving the labor force, tired of working and taking care of our kids and making a substandard wage,” said Davis.  “That’s over.”

“That’s going to affect the participation rate,” he added.  Not only may those workers choose not to re-enter the workforce, this shift in the economy will have other impacts.

“It’s going to be harder to come back into the labor force when the cost of childcare is exploding up, and that is, in fact, going to occur,” said Davis.

Parenting children, particularly those who would attend a childcare facility, has been an immense challenge during the prior two years, said Ullrich.

Why a labor shortage? These key numbers explain what’s happening

“I’m the only mom economist in the room, and as a working mom, which I have been for 18 years of my career, these past two years have by far been the worst,” she said.  “This has been a really difficult time for families, because of all the disruptions, and if you dig into the data, the reduction in the labor force participation rate has been predominantly in the retiring population and in minority women.”

Ullrich added that the data from the latest jobs report shows that “there are many fewer people working multiple jobs now than before the pandemic.”

Though 5.7% of workers held two or more jobs prior to the pandemic, said Ullrich, 5% of workers do so now.  That’s the equivalent of 598,000 jobs, said Ullrich, many of which could have been in the leisure and hospitality industry.

“Why people are making these choices,” said Ullrich.  “That’s complicated.”

“Wages are up, so maybe they don’t need that second job,” she suggested.  “Higher demands, perhaps at their primary job,” she said.

And it’s also possible that these folks left the labor force entirely, particularly if they are a parent.

“A lot of the difficult trends we had before Covid have been exacerbated,” said Flood, with one result being the perpetuation of long-lasting inequalities in our economy.  For some, said Flood, noting that he has witnessed this decision first hand with his own family, workers are leaving their jobs for different ones that allow for more family-friendly options.

“Not all labor markets have responded in the same way,” said Flood.  “That’s important for us to keep in mind.”

There could be a seismic shift in the labor market

“We underpaid restaurant workers, hotel workers,” added Davis.  “We can’t do that any more, they’re not going to work at those levels.”

Davis noted that companies have increased wages, including Amazon, Walmart, and many of the country’s other large employers.

“If wages are high enough, people will fill the jobs,” Davis predicted.  “One of the reasons there are so many help wanted signs are that so many people are having a difficult time adjusting to a $15 minimum wage.”

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Kassie Hoffman
Kassie pens down all the news from the world of politics on ANH.