ECONOMY WATCH
As the post-pandemic U.S. economy advances, retreats, then advances again, a common question is: what does this new, new normal look like?
This Economy Watch feature briefly documents changes in America’s economy now underway. With this update, starting with the big surprise … declining U.S. workplace productivity. This is followed by updated data covering economic indicators related to inflation, employment change, and labor force participation.
Productivity is Back!
As illustrated by the following graph, from 2012 through the 4th quarter of 2023, U.S. labor productivity has increased at an average rate of 1.4% per year. Just prior to the pandemic, labor output per hour peaked at an BLS-calculated increase of 3.5% year-over-year as of the 4th quarter of 2019. Less than a year later, calculated productivity spiked at an annual increase of 6.8% as of the pandemic affected 3rd quarter of 2020.
In 2022, productivity plummeted into negative territory extending through the 1st quarter of 2023. Finally as of the 2nd quarter, productivity was back into positive territory — at +1.2%. For this most recent 4th quarter, productivity has jumped to +2.7% — well above the long-term productivity gain averaging 1.4% per year.
Note: BLS calculates U.S. labor productivity in two ways. The method illustrated above compares the % change in labor force productivity as of a specified year divided by the productivity index for the same quarter one year earlier.
What gives? With the pandemic, productivity as recorded by BLS surged for reasons including extraordinary federal funding support for workers and businesses (on a temporarily reduced base of employed workers).
More recently with the pandemic now largely in the rear-view mirror, reported productivity nosedived to the negative — to a low of a negative 2.4% year-over-year (decline) as of the 2nd quarter of 2022. Finally, labor force productivity went to the positive a year later as of the 2nd quarter of 2023, further up now as of the year end.
Factors affecting weakened productivity likely have included experienced baby boomers retiring, supply chain bottlenecks and unprecedented reshaping of American attitudes and values placed on work versus other quality of life considerations. Headline supply-side issues range from a nationwide mismatch of workers relative to skills required — together with generationally unprecedented inflation that likely can not be fully resolved prior to addressing the workplace productivity challenge now and over this decade.
The composition of employment change also affects the productivity calculations. With early phase pandemic recovery, much of the re-hiring was re-focused on lower paid/lower productivity front-line retail and hospitality workers. Now as of Q4 2023, re-hiring appears to be shifting more toward higher paid workers. Going forward, continued progress toward improved productivity can go a long way to reducing upward inflation pressure.
Beating INFLATION
After bottoming out in June 2023, annual CPI inflation has bounced in a range of just under 3% to less than 4% on an annualized basis. As of March 2024, the monthly year-over-year inflation rate comes in at 3.48%, which is nearly 0.32% points above February’s rate.
While still below the average 4.44% inflation rate experienced since 2020, upward price pressure is now again being experienced across the U.S. Efforts to reduce CPI inflation back to the Federal Reserve target of 2% year-over-year appear to have stalled out — at least for now.
Looking back to a time just before the COVID pandemic, the combination of public sector stimulus and unexpectedly rapid resurgence of consumer demand — even amid the pandemic and then Ukrainian war — has been accompanied by energy, supply chain and labor shortages. CPI inflation peaked at over 9% in June 2002 but has since been on a downward trend as the Federal Reserve has pursued monetary tightening with higher interest rates — albeit with some renewed upward price pressure now evident.
Demand-side drivers of inflation including pre-2022 historically low interest rates have been addressed by increased Fed fund rates. Excessive and inflationary federal stimulus funding has proven more difficult to remedy. Addressing potentially persistent supply-side drivers requires longer-term attention to increasing labor force participation and moderated wage increases - with even more emphasis on improved workplace productivity going forward. Nation-wide employment remains below what is suggested by the pre-pandemic trend (as noted below).
Resurgent JOb Growth:
STRONG BUT Not Yet Enough
From January 2012 through March 2024, U.S. employment has increased by more than 18.7% — with 158.1 million non-farm jobs nationwide as of this most recent month. In the month from February to March, the U.S. added an estimated 303,000 net new jobs (seasonally adjusted). February’s job growth remains well above the long-term average add of 170,000 new jobs per month since 2012.
Total seasonally adjusted non-farm employment is now 3.8% above pre-pandemic job estimates. However, as illustrated by the above graph, U.S. employment remains about 3.81 million jobs below the longer-term trend-line suggested by the pre-pandemic experience of 2012 to early 2020. After rapid catch up in the immediate aftermath of the pandemic, closing the remaining gap has proceeded more slowly.
The good news is that American job growth is now continuing at relatively high levels relative to normalized patterns. Unfortunately, there remains a still substantial gap between current job count and where the American economy should be based on long-term performance if pandemic disruption had not occurred. Going forward, improving productivity means more potentially can be done with somewhat lesser labor input including payoff from commercially viable artificial intelligence (AI) applications.
LABOR FORCE PARTICIPATION
A somewhat different story is indicated for labor force participation. In the early phases of economic recovery from the COVID-19 pandemic, attention shifted to workforce participation as a significant indicator of U.S. economic potential and constraints with a new, new normal. That has since changed as participation rates appear to have peaked out this past summer— at 62.8% of the labor force. Data for January and February 2024 indicated a 0.3% point drop in participation rates as compared to November of last year in seasonally adjusted terms. However, participation picked up in March to 62.7% — back to just 0.1% point below the post-pandemic peak.
From February to April 2020, 25.5 million Americans saw their jobs disappear — a figure encompassing non-farm, self employed and gig workers. Over the same time period, the nation’s labor force declined by a figure approaching 8.2 million workers — accounting for 32% of the initial net pandemic job loss. In effect, seasonally adjusted labor force participation dropped from 63.3% to 60.1% of adults age 16+ in the space of two months (including individuals either not qualifying or otherwise not applying for unemployment benefits).
Through the summer of 2020, work force participation partially rebounded. Since then participation rates have bounced up and down, finally building back to a seasonally adjusted figure in the range of 62.8% in August 2023. With the end of summer, participation rates again started to slide. In recent months from November 2023 to February 2024, the reported participation rate (seasonally adjusted) dropped from 62.8% to 62.5% — before rebounding some this most recent month of March.
Looking back over the full pandemic and then recovery, a range of reasons have been cited and debated as contributing to weakened work force participation — including accelerated baby boomer retirements, smaller cohort of Gen Z new work participants, child care concerns, mismatch of worker skills vis-a-vis employer needs, residual fear of COVID workplace exposure, lack of jobs with full 40-hour schedules, legacy of COVID-period governmental income support, changing personal lifestyle expectations, and the recent ravages of inflation.
Looking ahead, in-depth analysis by E. D. Hovee indicates that even if participation rates were to recover to higher levels as experienced a decade ago, only 25-30% of the current labor shortage could be addressed nationwide. The U.S. economy can expect prolonged workforce supply shortages over the course of this decade — due primarily to demographics of an aging (and retiring) workforce. Looking beyond labor force participation, boosting productivity is likely an even more critical factor necessary to bring demand and supply back into better balance. For more detail, click to my September 22, 2022 blog post titled:
Labor Force Deep Dive
Added Note: This data is from a monthly Current Population Survey (CPS) conducted by the U.S. Bureau of Labor Statistics (BLS). The data is somewhat at variance with a separate Current Employment Statistics (CES) survey of employers. CPS data is collected for workers age 16+ but includes farm, self-employed and gig workers. CES data is age unrestricted but is limited to non-farm employment and excludes self-employed.
