LEGISLATIVE REPORT

A Conundrum: Ebbing GDP Amid Tight Job Market

BY DICK STORAT

Last year at this time, the U.S. economy was on its way to setting a recent annual high growth rate of 5.7%, as consumer spending propelled economic recovery from the recession-causing COVID-19 lockdowns of 2020. This year tells a different story, however.

During the first half of this year, there has been little growth in consumer spending after the adjustment for rising inflation. Since nondurable goods account for some three-quarters of all corrugated packaging made in the U.S., the fact that spending for these fast-moving goods has been declining since early this year is of special concern. The chart at right shows this weakness.

Consequently, economic activity as measured by the gross domestic product (GDP) faltered and posted small declines in each of the first two quarters of this year, as indicated in the top chart on p. 5.

Concurrently, though, the labor market remained extremely tight. Jobs were being added at a rate averaging 470,000 jobs per month during the first seven months of this year. This was insufficient to satisfy the demand for workers, which reached 11.2 million in July. One reason for this shortfall is the decrease in the foreign-born working-age population. There is a shortfall of 1.7 million of these workers since before the pandemic. There are still two job openings per every unemployed worker in the U.S. Until this ratio comes down significantly, the central bank will continue to pressure the demand side of the economy, reducing inflation-adjusted consumer spending and increasing the likelihood of recession. At midyear, the year-over-year wage gains had reached 5.7%. A search of the Indeed job search website for mentions of the hourly rates of $15 per hour and $20 per hour confirmed this trend. Since early this year, the mentions of $15 declined by 76%, while the mentions of $20 rose by 33%.

The conundrum between the lack of GDP growth and a tight labor market can be explained partly by low productivity. Businesses might be hiring actively, but if new workers are not as productive, production will falter. Several activities with their roots in the pandemic could be at work.

Earlier retirements take experienced, productive workers out of the workforce. Job switching is at an all-time high. New employees require some training time to become as proficient as their predecessors, just to mention a few factors. Output per hour in the nonfarm business sector fell at an annual rate of 7.3% in the first quarter of 2022, the second-weakest reading since productivity has been reported. If this continues, the GDP decline will seem like more than a passing cloud. The bottom chart on p. 5 shows the producer price index and the consumer price index (CPI). At the beginning of the third quarter, there was some evidence that producer prices had peaked. This behavior is primarily the result of

Real Consumer Spending on Nondurable Goods Year-Over-Year Percentage Change 25% 20% 15% 10% 5% 0% –5% –10% 19J 20J 21J 22J

Source: Bureau of Economic Analysis

gasoline and other energy prices declining. However, it remained at an uncomfortably high rate of 10% growth over the previous year. CPI growth shows a similar trend, but at around 8%, it also remains elevated well above the Federal Reserve’s target rate of 2%.

Manufactured foods are intensive consumers of corrugated packaging. The food component of the CPI rose by 1.1% in July. That brought the year-over-year rise to 10.9%, the largest such gain since May 1979. July was the seventh consecutive month of monthly gains of 0.9% or more.

The food at home index rose 13.1% over the past 12 months, the largest annual increase since the period ending March 1979. The index for cereals and bakery products increased 15% over the year. The remaining major grocery store food groups posted increases ranging from 9.3% (fruits and vegetables) to 14.9% (dairy and related products).

The index for food away from home rose 7.6% over the past year. The index for full-service meals rose 8.9% over the past 12 months, and the index for limited-service meals rose 7.2% over the past year.

At the producer level, food inflation is also quite elevated, suggesting that consumers may still face even higher prices at grocery stores in the weeks ahead. Overall, the producer food index rose by 1% last month, bringing the annual gain to 15%. Components of the producer food index that have suffered the greatest increases include fresh and dried vegetables and eggs. Vegetable prices rose an average of 12.7% in July, while eggs posted an even higher gain of 44.2%.

So, the open question as 2022 comes to a close is whether the central bank’s rapid rise in interest rates will cause enough reduction in consumer spending so businesses will not need to fill all those currently empty positions. 

U.S. Real GDP Growth

8 7

Percent Change Annual Rate –1 0 4 5 6 1 2 3 6.7% 2.3% 6.9% Annual 2019: 2.2% 2020: –3.4% –2 –1.6%

–3 21Q2 21Q3 21Q4 22Q1 22Q2

Dick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.

–0.9%

Sources: BEA, RSA

U.S. Producer Price and Consumer Price Indices Year-Over-Year Percent Change 12 10 8 6 4 Federal Reserve Target: 2% 2 0 –2 19 21 PPI CPI 22

Sources: FRB, BLS