According to the report, the divergence between labor markets and the overall economy this year is striking and unusual.
“Anyone using the impressive employment trend to gauge what real GDP would do was stunned by two quarters of negative growth in the first half of 2022, while those relying on the production trend to predict the hiring underestimated the monthly payroll number,” the report said. said.
“Even with the hindsight of 20-20, it’s hard to understand how so many Americans got hired without showing anything in terms of production growth.”
One explanation is that average labor productivity has recently fallen – likely reflecting some of the effects of the pandemic.
At the start of the pandemic, some low-productivity sectors (restaurants, hotels) saw their activity drop completely, and others (retail, banking) moved to the internet, increasing average productivity.
More recently, as public health restrictions have been lifted and economic conditions have returned to normal, the emergence of low productivity reflects a return to trend.
“One possibility, then, is that the weak first-half GDP relative to employment was driven by the creation of so many low-productivity service jobs that consumers tried to ignore Covid and to resume their previous activities,” the report said.
“If that’s the case, we may still have a bit more to run in that direction in the third quarter, as we are still completing the recovery in consumer services versus goods.”
At the same time, supply chain disruptions may have undermined productivity in sectors such as transportation and warehousing which have reported low productivity this year, he suggested.
Recent economic data may also have been somewhat misleading, the report notes.
“Real GDP might not have been as bad as forecast in the first half, and hiring might not have been as fast as payroll data would suggest,” he said. -he declares. “Alternative measures for these two indicators suggest that the gap between the two may be narrower than what we observe in the most frequently cited numbers.”
Possible data discrepancies aside, “we are late for GDP growth to catch up at some point,” the report said.
Indeed, the bank’s economists expect annualized real GDP growth of 2.4% in the third quarter.
In the longer term, the recent strength in employment should also weaken.
“The Fed is committed to slowing the labor market, and if GDP and employment realign, payroll gains will fall sharply and the unemployment rate will rise a little next year,” the report said.