Nela Richardson, chief economist at Automated Data Processing (ADP), recently said that because of structural changes in the labor market, labor shortages will be a long-term phenomenon, and high inflation in the United States "will always be a risk."
ADP is one of the world's largest human resource management companies, and the ADP National Monthly employment Report sponsored by it reflects the employment number of private statistics in the United States, which is known as "small non-farm" data.
Last year, as inflation in major economies spiraled out of control in the wake of the COVID-19 pandemic, the Fed embarked on a series of rate hikes, raising the target range for the federal funds rate from a range of 0.25-0.5% in March 2022 to a range of 5.25-5.5% in July 2023, the highest in 22 years.
Before that, interest rates had remained low for a decade as central banks sought to stimulate their economies after the global financial crisis.
The age of labor shortage is coming
Richardson said in a column on Friday that U.S. economic growth over the past decade has been fueled by low interest rates as policymakers focus on eliminating recessions without inflationary pressures.
Still, she noted, "Now that inflation has awakened, if you look at demographic trends, labor shortages are not going to go away." "While things are getting better, there are structural changes going on in the labor market because of the aging of the U.S. population, so that means inflation will always be a risk and a return to zero or near rock-bottom interest rates will be very difficult to support the economy."
Demographic issues have always been a long-term determinant of national economic and inflation levels. The fading of demographic dividend may make the era of low inflation and low interest rates eventually become the past.
Richardson added that the "training wheels have come off" of the U.S. economy and that businesses and consumers are now having to "ride a regular bike."
The economy remains strong
A wide range of economic data released this week added to the uncertainty surrounding the U.S. economy.
ADP's monthly report this week showed private payrolls increased by just 89,000 in September, well below market expectations of 160,000 and down from an upwardly revised 180,000 in August. The cliff-edge contraction in the data reflects a slowdown in job growth in recent months.
However, the September "small non-farm" data is very different from the official data released by the US Bureau of Labor Statistics on Friday (6). Friday's nonfarm payrolls report showed that 336,000 jobs were added in September, well above market expectations of 170,000. The unemployment rate was unchanged from 3.8 percent in August, slightly above the consensus forecast of 3.7 percent.
Job openings also unexpectedly rose in August, rising to their highest level since the spring, the Labor Department said earlier this week, reflecting a labor market that remains strong and tight.
Despite fears that the Fed's unconventional monetary policy tightening would lead to a recession, the truth is that the US economy remains surprisingly strong. The rate-setting Federal Open Market Committee (FOMC) paused its rate-raising cycle in September and sharply raised its economic growth forecast, now expecting US GDP to expand 2.1 per cent this year.
Richard Flynn, UK managing director at Charles Schwab, said investors will interpret the nonfarm payrolls report as a sign that "labor market demand is at a healthy level."
"The strong data released should help contain recession fears and generate optimism for sectors of the economy that may be moving toward stability," he said.
Feedback loops on employment and policy
While the employment report has traditionally been seen as a lagging indicator, with people saying that "six to nine months of Fed policy will show up in the labor market," Richardson, ADP's chief economist, noted that the relationship between the labor market and monetary policy has been completely changed in the current cycle.
"I think it's a feedback loop that doesn't get enough attention. People say the labor market or good employment is lagging data, but the employment situation is actually driving the Fed's current policy, so there's a feedback loop between the two and those effects can be amplified."
"Simple relationships no longer exist. We are in a complicated time for the global economy, not just the United States, where actions taken by the Federal Reserve affect the labor market and vice versa. The labor market is now driving Fed policy."