Under Biden, unemployment fell to 3.5%. For how much longer?

WASHINGTON – President Joe Biden keeps seeing good economic news and bad public approval ratings. The unemployment rate fell to 3.5% in March. More than 236,000 jobs were added. But there was no political payoff for the president.

US. Adults skip the jobs numbers and generally feel terrible about the economy. White House staffers can cite many reasons for the pessimism: high inflation, the pandemic hangover, and the political polarization that automatically leads Republicans to believe the economy is doing poorly under a Democratic president.

Going forward, a looming challenge for Biden could be the expectation that unemployment will get much worse this year.

This is the opinion of the Federal Reserve, which expects an unemployment rate of 4.5%. And the Congressional Budget Office (5.1%). Even the proposed budget that Biden just presented shows an increase (4.3%) from the current rate. Many Wall Street analysts also work under the accompaniment that the Fed curbs inflation by raising interest rates, which in turn causes demand to fall and unemployment to rise.

Friday’s jobs report showed the economy is slowing as wage growth slows, but the job market is still running much hotter than the broader economy, which may fuel doubts. Biden’s bet is that conventional economic wisdom is wrong and that inflation can be beaten at 6% while unemployment is kept low.

“We continue to face economic challenges from a position of strength,” Biden said in a statement accompanying the latest jobs report.

A new independent economic analysis helps show why the low unemployment rate hasn’t yet caught on with people: There isn’t enough labor to fill the vacancies, causing the economy to work with speed bumps and friction that’s slowing things down appear worse than they are in the data. The analysis suggests that the economy would probably function far more smoothly with a higher unemployment rate of 4.6%, although this could result in almost 2 million fewer people being employed.

The job market is what economists call “inefficiently tight,” a problem the United States also faced during the Vietnam War, Korean War, and World War II. The current tightness is as great as it was at the end of World War II. This mismatch is causing businesses and consumers to feel the economy is at an impasse, said Pascal Michaillat, an economist at Brown University.

“For shopkeepers, this means working shorter hours because it’s not possible to find workers to fill the extra time slots,” he said. “For households, it means more time hiring nannies, plumbers or construction workers and less time doing pleasant things.”

Based on his vacancy and employment calculations from a 2022 paper he co-authored with economist Emmanuel Saez, Michaillat estimates that an unemployment rate of 4.6% would make the labor market efficient. At this rate, the day-to-day transactions that shape an economy would experience less friction as labor demand would be closer to supply. Government figures released on Tuesday show employers have 9.9 million job vacancies, almost twice as many unemployed as job seekers.

That sounds like a good problem because it implies that wages should rise. But economic theory suggests that the only way to resolve this situation is to increase unemployment.

When asked what this dilemma might mean for Biden, Mikhaillat suggested, “Economy mixes with politics, as so often does.”

When Republicans criticize Biden, it is often because of the type of shortages Mikhaillat describes, as well as inflation.

House Ways and Means Committee Chair Jason Smith, R-Mo., said small business owners “tell us that Democrats’ anti-labor policies have made it difficult to stock their shelves, hire workers and keep their doors open.”

More than two years after Biden’s $1.9 trillion coronavirus relief package became law, it’s a humiliating frustration for the White House that so many people feel the economy sucks when its balance sheet unrivaled in jobs under modern presidencies.

So far, Biden’s unemployment rate is better than that of Presidents Ronald Reagan, Bill Clinton, Barack Obama, Jimmy Carter, Gerald Ford and the two Bushes. While unemployment was lower for a time under Presidents Lyndon Johnson and Richard Nixon, a smaller proportion of people were employed compared to today.

Biden set out to use the COVID-19 relief funds to get people back to work quickly and prevent the typical recession “scarring” that can leave people earning less for the rest of their careers and in some cases become permanently unemployed. He successfully accomplished that mission as the economy has about 4 million more jobs than the Congressional Budget Office projected at the time.

A White House official said the guidelines were designed with the specific goal of bringing back jobs faster than in previous recoveries. After the Great Recession began in late 2007 and the economy collapsed, it took more than six years for total US jobs to return to pre-downturn levels. As the pandemic recovered, total jobs rebounded to previous levels in just over two years.

The speed of recovery has benefited historically disadvantaged groups. Black unemployment fell to 5% in March, the lowest on record. And the black labor force participation rate — which measures how many people have jobs or are looking for work — surpassed white levels last month.

The official, who spoke on condition of anonymity to have private calls, said Biden’s goal is to spur a hiring surge that would lead to strong growth over the long term. If the jobs recovery dragged on, some people would give up hope and retire, reducing the economy’s ability to grow for decades to come.

Biden has dismissed criticism that the scale of COVID aid contributed to inflation, although research released by the New York Fed suggests federal aid accounted for about a third of the higher inflation from late 2019 through June 2022.

Nick Bunker, director of economic research at Indeed Hiring Lab, said Friday’s jobs report indicated that the unemployment rate is unlikely to rise over the next three months. He said recruitment is still outstripping population growth.

He noted the strength of job growth compared to the Great Recession, but said many people were still adjusting to the reality of higher inflation and the fallout from the pandemic.

“The speed of this recovery has clear benefits,” Bunker said. “Speed ​​is great because it gets you where you’re going, but it can be disconcerting because there’s whiplash.”