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Friday’s Jobs Report: An Over Stimulated Economy?

Andrew Chamberlain

Andrew Chamberlain

Andrew Chamberlain, Author at Glassdoor US | Mar 6, 2018

In January, a strong BLS jobs report suggests the American economy is on track to continue its remarkable growth streak in 2018. On Friday, we’ll get the latest February jobs report. Here’s what we’ll be watching for:
  • +186,000 new jobs added to nonfarm payrolls in February;
  • Unemployment rate down slightly to 4.0 percent;
  • Average hourly earnings up 2.6 percent from one year ago;
  • Labor force participation rate down slightly to 62.6 percent.
When economists teach how governments can impact the economy, they usually focus on two tools: monetary policy and fiscal policy. How are those two tools impacting the labor market today? For close to a decade, monetary policy has been about as stimulative as possible. Between 2008 and 2016, the Federal Reserve held the economy’s benchmark interest rate near zero -- a historically unprecedented move. This was done to boost the flailing economy after the collapse of housing markets during the Great Recession. Only recently has the Fed begun returning interest rates to more typical levels. But even after several Fed increases since 2016, the target interest rates today hover at 1.25-1.5 percent -- still very low historically. Even though economists expect three more Fed interest rate increases in 2018, monetary policy continues to be stimulative by historical standards, pushing down on the economy’s gas pedal and fueling growth. What about fiscal policy? In this toolbox, lawmakers have two tools to guide the economy: taxes and government spending. On the tax side, with the recent passage of a $1.5 trillion federal tax cut, the economy today is riding a huge upward wave of fiscal stimulus. The bill delivers large corporate tax rate cuts to U.S. employers, and offers powerful incentives to invest in new equipment, software and other capital. And on the spending side, the latest White House budget proposal would be stimulative as well, pouring a whopping $4.4 trillion into the economy through federal programs. In economics textbooks, stimulative tax cuts are best timed when the economy is in recession and many workers are unemployed. In that environment, tax cuts can help jolt labor markets back to life, putting workers back in jobs without sparking inflationary pressures. But today, with an economy already at full employment, it remains to be seen what the impact of both a stimulative monetary and fiscal policy together at a time of full employment will bring in 2018. In the short run, we should expect continued strong economic growth throughout 2018, as companies and households respond to large federal tax cuts. For that reason, we expect to see strong job gains of roughly 186,000 new jobs added in February and an unemployment rate down slightly to 4.0 percent. As the labor market continues to tighten, watch for growing wage pressures in key labor markets facing worker shortages today -- health care, e-commerce, technology, and certain in-demand professional services. Of course, the economic party of a stimulated economy can only go on for so long. Eventually, every stimulative policy comes home to roost in the form of some type of economic hangover in the future -- whether rising inflation, an increasingly over-valued stock market, unsustainable housing prices in booming metro areas, or other runaway asset bubbles. The key to a successful economic stimulus isn’t the policy doing the stimulation -- it’s the policy later on that brings the economy down to a soft landing. That’s the story we’ll be watching unfold as we look ahead to 2019 and beyond. To speak with Dr. Andrew Chamberlain about this month’s jobs report or labor market trends, contact pr [at] glassdoor [dot] com. For the latest economics and labor market updates, subscribe to email alerts here and follow @adchamberlain.
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Andrew Chamberlain

Andrew Chamberlain

Tags:Labor Market

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