- The impressive jobs numbers reveal momentum in the services and public sectors.
- Consumers, shocked by 2022 inflation spike, have belatedly begun to feel better.
- We see gathering upside to GDP growth, revising up our 2024 forecast by 30bps to 2%.
- Strong jobs and incomes may slow down the path of disinflation.
- But a sharp rebound in inflation is unlikely, given the spate of supply side reforms underway.
Commentary: Implications of the strong US labour market
Withstanding two years of monetary policy tightening, the US economy continues to chug away at above-trend growth rate, pulling up the labour market with it. The statistics are impressive across a wide range of measures. Unemployment is below 4%, weekly initial claims for unemployment insurance has been near historical lows for over two years, and the labour force participation rate is on the rise after a few years of pandemic-driven dip. Labour market would have been even tighter had it not been for the fact that immigration has picked up, boosting the supply of workers.
Strong demand for workers has translated into healthy wage growth. We estimate that real wage growth to be positive in both 2023 and 2024, implying purchasing power getting restored after the setback caused by the inflation spurt in 2022. Consumers, shellshocked by that episode, have taken their time to recognise the improving economic landscape, but they are catching up. University of Michigan’s US index of consumer confidence has been trending up, reaching a two-and-half year high in March. One way to look at labour market strength is to see it as part of post-pandemic normalisation. But this cycle is anything but “normal.” Since 2022, the labour market recovery has been not just vigorous, its composition atypical. In nonfarm payrolls, for instance, service sector jobs growth has been much more robust than the goods sector. Even more striking is the role of public sector in jobs creation. While private sector employment has expanded impressively, its growth rate pales in comparison to government jobs, which have been growing at three times the pre-pandemic period.
The data underscore the pronounced role of the public sector in this cycle. From record cash transfer to the population during the lockdown to multi-trillion dollar infrastructure programmes, this cycle has been supported by public sector outlays like never before. From strong retail sales to the run-up in equity prices, the outlook has strong underpinnings. Consumers are optimistic about job and income prospects, they have enjoyed substantial capital gains on their portfolios of stocks and homes, and their savings are receiving positive real returns. Taking these into account, we have revised up our 2024 GDP growth forecast to 2%, while recognising additional upside to the forecast if financial markets remain stable the rest of the year. Could the buoyant labour market spill over into inflation risks? We think there is a difference between inflation turning sticky, which may be happening right now, and rebounding substantially, which we think is unlikely. Headline inflation may not ease much further as commodities bottom, but an economy with growth in jobs and infrastructure should be a stable one. There might even be room for some rate cuts eventually.
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