27 November 2022

Weak September Jobs Report Underscores Fed’s Misdiagnosis of Delta Variant’s Toll on the Economy

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The weak September jobs report offered the latest sign of the coronavirus pandemic’s hold on major sectors of the economy, conflicting with the type of recovery the Federal Reserve forecast back when the nation was entering its recent surge in cases.

A growing number of economists and experts acknowledge that the nation’s top economic policymakers underestimated the delta variant’s threat to job growth, inflation, global supply chains and people’s own comfort levels going into the fall. In recent months, the delta variant of the coronavirus tore through communities with low vaccination rates, spurred sweeping new workplace rules from the Biden administration and rattled consumer sentiment.

“I think there’s a common thread to the mistake in the Fed’s forecast, which is how the pandemic is going to impact the economy even after we got through the worst of it in 2020,” said Skanda Amarnath of Employ America, a left-leaning think tank that advocates for the Fed to let the economy run hot.

Just 10 weeks ago, Federal Reserve Chair Jerome H. Powell explained the Fed’s rosier forecast by saying the delta variant could have fewer implications for the economy if it followed the pattern of previous covid surges. Powell said in late July that with much of the country vaccinated and there being less of a likelihood for shutdowns, “we’re not experts on this but — it seems like a good, going-in estimate would be that the effects [of the delta surge] will probably be less.”

Figures released Friday by the Labor Department underscore how off-base that assessment turned out to be. The labor market in September added the lowest number of jobs this year, and more than 300,000 women over age 20 dropped out of the labor force last month, because they quit work or halted their job searches.

Claudia Sahm, a former Fed economist and now a senior fellow at the Jain Family Institute, said it was more reasonable for the Fed to back a sunnier forecast before delta’s full toll came into view. But Sahm pointed to one of Powell’s July remarks — when he said “we’ve kind of learned to live with it” — as being out of step with the ongoing reality for many Americans, and at odds with the pandemic’s mounting psychological toll.

“What I felt was misguided was saying it with any authority,” Sahm said. “That just felt way too strong, and way too much of an introspection from a group of people, not just him, who get to work from home. They’ve been able to hire remotely.”

The economic head winds come as the central bank plans to ease support for the markets, a move now expected for November. While most Fed watchers expect the Fed to stick to its plan, they say Friday’s jobs numbers underscore the Fed’s tricky test of changing policy at a time when there’s room to grow in the labor market, but inflation is running high.

Meanwhile, the missed projections don’t help the Fed as it battles a range of perception problems during the pandemic. The Fed deployed its tool kit in full force last year to rescue the economy, but those moves had ripple effects for inequality and did not serve everyone equally. Meanwhile, the financial trading activity of top Fed officials has spurred an independent review by the Office of Inspector General for the Federal Reserve Board, over whether the behavior violated both ethics rules and the law.

Friday’s jobs report is the last such release before the Fed’s November policy meeting, when officials are expected to officially announce a “taper” of the Fed’s support for the markets. Fed officials have said they need to see “substantial further progress” on inflation and the labor market before scaling back on $120 billion a month in asset purchases.

At a news conference last month, Powell said some of his colleagues believed that bar had already been met, while others wanted to see more job gains before greenlighting a taper. Powell said his view was that “the test is all but met” and wouldn’t hinge on gangbuster job growth in September. (At that point, the August jobs report had come in at a disappointing 235,000, although on Friday the August jobs report was revised up to 366,000 jobs gained.)

“It wouldn’t take a knockout, great, super-strong employment report,” Powell said last month. “It would take a reasonably good employment report for me to feel like that test is met.”

Indeed, there were some brighter spots to the September jobs report. Retail added 56,000 jobs, and professional and business services, such as architectural and engineering services, technical consulting services and computer systems design, were up 60,000 for the month. Some economists also cautioned that the drop of 161,000 jobs in state and local government payrolls was due in part to seasonal adjustments.

Fed watchers expect the central bank will keep its plans to taper next month. They point to falling covid cases and note that Fed officials, along with other economic policymakers in the Biden administration, warn against drawing too much from a month or two of data — good or bad.

Plus, there could be a cost if the Fed starts to show cold feet. Powell and other Fed officials took great pains to gradually lay the foundation for the November taper, and those expectations have now been baked into the markets.

“What you have to weigh is the market signal that a delay sends, versus the cost of waiting for more information,” said Constance Hunter, chief economist for KPMG. She added that given “the complications around changing one’s message, and the gymnastics involved in really making sure that that goes smoothly, I think it’s better to just stay the course. Maybe what you do is elongate the taper period.”

Meanwhile, the delta variant has roiled global supply chains — which are inextricably tied to inflation and people’s expectations of how high prices will stay, and for how long. Fed officials continue to insist inflation is “transitory,” or temporary, and that prices won’t simmer down to the Fed’s 2 percent annual target until supply chain bottlenecks have time to clear.

But testifying on Capitol Hill last week, Powell said inflation has become broader and more structural than it appeared earlier in the year. The Fed’s preferred measure of inflation showed prices were up 4.3 percent in August compared with the year before. In a recent speech, Fed governor Lael Brainard pointed to builders who can’t get enough construction materials and to North American auto production, which was paused by shutdowns in Malaysia and Vietnam.

“It is frustrating to acknowledge that getting people vaccinated and getting delta under control still remains the most important economic policy that we have, and it’s frustrating to see the bottlenecks and supply chain problems … apparently getting a little bit worse,” Powell said last week on a panel of international central bankers. He said that while the overall forecast was still positive, parts of the recovery remain “highly uncertain.”

Powell and other Fed leaders have long said vaccinations are the most direct way to sustain the economic recovery.

On jobs or inflation, Fed officials say they need months of data to orient themselves through the pandemic’s fog. If anything, delta is a cautionary tale of how hazy the horizon remains.

“There’s still uncertainty between now and the November announcement,” Amarnath, of Employ America, said. “We’re about three weeks away. Odds are, the Fed is going to stay the course. But you do have to ask, given how much they’ve been off on the public health dynamics, what they expect to do may not be what they ultimately do. It’s a crack in the door that’s open for things to change.”

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