Economic Data

MILTON EZRATI is chief economist for Vested, a contributing editor at The National Interest, and author of "Thirty Tomorrows" and "Bite-Sized Investing.” Milton Ezrati

The Economic Data Are Contradictory

Employment and sales cannot diverge for long

few months ago, all of the economic indicators seemed to line up well. They painted a positive picture. Despite the Omicron coronavirus variant and supply chain problems, it was clear that the economy was rebounding strongly from pandemic-induced strictures.

Consumers were buying and businesses were ordering new equipment and systems. Families were purchasing new homes and builders were scrambling to construct them. “Help Wanted” signs appeared everywhere.

More recently, the picture has become mixed. In fact, it has become downright contradictory. A recent report from the Labor Department shows historically robust hiring and a welcome flow of new entrants into the workforce. At the same time, the recent report on the fourth quarter’s gross domestic product (GDP) signals weakness in most sectors. Retail sales have declined, as have business orders. Even government spending has slowed.

Hiring and sales can’t go in divergent directions for long. Unless sales pick up soon, jobs growth will falter and the picture will become consistent—but not nearly as uplifting as it looked a few months ago—again.

By itself, the recent employment report for January looked good. Total employment growth for the month was 467,000, edged down from 510,000 in December 2021 and higher figures in prior months, but still a historically robust gain.

According to the Labor Department’s household survey, about 157 million Americans are now at work, up by a strong 0.8 percent from November 2021. A bit more than 1 million people joined the workforce in January, raising what the Labor Department calls the “participation rate”—people working or looking for work as a percent of the civilian population—from 61.9 percent in December 2021 to 62.2 percent in January.

Because not of all these new entrants found work immediately, the number of unemployed ticked up by 194,000 in January, and the unemployment rate—those looking for work as a percent of the labor force—inched up from 3.9 percent in December 2021 to 4 percent in January. All in all, a good showing.

A look at recent sales figures tells a very different story. The GDP report for the fourth quarter of 2021 looked strong, but only on the surface. Overall, real GDP rose at an annual rate of 6.9 percent, but that was misleading. Most of the growth came from retailers and wholesalers rebuilding inventory stocks, no doubt a response to the summer quarter’s acute shortages.

Actual sales to consumers, businesses, homebuyers, and governments grew on balance at only a 2 percent annual rate, slower than the summer quarter’s Omicron-burdened 2.3 percent rate. Retail sales fell by 1.9 percent from November 2021 to December 2021, the most recent month for which data exists. Business orders for new capital equipment fell by 2.4 percent during December 2021, and money spent on the construction of productive facilities fell by 0.7 percent. The only major sector of the economy that showed strength was housing, where sales jumped by 11.9 percent in December 2021.

Unless these sales pick up, the recent employment report, as gratifying as it is, can’t repeat for long. Indeed, the only reason the jobs report looks as good as it does is because businesses took advantage of the increased participation in the labor market to fill positions that weren’t new, but rather those that had long been vacant.

As was widely reported, roughly 10 million job vacancies existed at the end of 2021. The strain of that worker gap is evident in the Labor Department’s report on worker productivity—output per hour. Businesses were so stretching their existing workforce that productivity surged at a 6.6 percent annual rate during the fourth quarter of 2021, far faster than the 2.3 percent rate of advance averaged during the prior six quarters. But that kind of stretching can only go on for so long. The employment growth in January was more of an effort to relieve a strain placed on existing workers from past sales levels than a sign of any need for new production.

The labor shortfall was so severe that this backing and filling of jobs will likely need to go on for a couple of months more, even if sales fail to regain their momentum. After all, there are still a lot of open positions. But unless sales pick up soon, this robust hiring pattern will end. Then, jobs growth will slow and issue the same signs of lost momentum that are presently evident in consumer spending and business’ capital spending. Housing growth might well persist because it’s an excellent inflation hedge.

Retail sales have declined as have business orders. Even government spending has slowed.