The Bureau of Labor Statistics just reported very strong job growth for July. The economy created a whopping 943,000 new jobs. This lowered the unemployment rate to 5.4%. It also shows that current economic growth is probably higher than the 6.4% growth recorded in the first half of this year.
The labor force participation rate edged up slightly, indicating about 160,000 unemployed workers decided to actively seek a job. This is a positive sign, although admittedly there are about 1.8 million unemployed workers who are not currently seeking employment but should be.
That’s mostly because their state unemployment compensation plus the federal government’s $300 weekly addition, results in those workers earning as much not working as they would working. The federal government addition will expire next month. This will result in most of the workers actually re-entering the workforce to find a job.
That means in the Fall we will likely see more months of large employment gains. Once those workers seek employment, the labor shortage will be eased. By year-end the unemployment rate will fall, perhaps as low as 4.5%. Most economists will say that is at or very near a full employment level.
If that is the case, the Federal Reserve (Fed) will have to reverse its policy of stimulating the economy. The problem is that taking this action at the end of this year or early next year, may be too late to solve our growing and very severe inflation problem.
In fact, based on the July job report, it is evident that the Fed should act immediately, rather than waiting another six months. The longer they wait to act, the more severe action they will be forced to take.
How bad is the inflation problem?
Prices have increased more than 3.5% since January of this year through to the end of June. Next week, the Consumer Price Index for July will be released. While some specific commodities such as lumber and copper had declined in price from the record highs, excess demand in the economy will probably result in a monthly CPI number in the .5% to .7% range.
That means through July of this year prices will have increased more than 4%. If this pace continues, the CPI for 2021 will exceed 7%. The Fed’s target is in the 2% to 3% range.
The Fed should immediately move to reverse two key policy actions. First, the Fed continues to rapidly expand the money supply which when the economy is operating at or near full capacity will simply lead to more inflation.
The Fed must immediately and gradually begin to end its policy of buying $120 billion worth of government bonds each month. They do this by electronically printing more money which increases the money supply and leads to inflation.
Also, the Fed must immediately and gradually begin to raise interest rates. These actions will take enough demand out of the economy to reduce inflationary pressures, but not too much demand so that growth slows. This is exactly what the Fed did from the end of 2016 to the end of 2018.
During that period the Fed increased interest rates eight times, by one-quarter of a point each time. The result was low inflation while there was modest economic growth.
If the Fed waits until next year to take action, the action will have to be much more drastic, meaning interest rates will rise faster and the bond purchasing program will have to be reversed more quickly. If the Fed moves too fast, it could significantly slow economic growth.
The US economy is in the midst of an economic boom. Our total level of output now exceeds the pre-pandemic levels, meaning no more stimulus is needed. The Fed should immediately reverse its policy actions. Also, the Biden Administration must refrain from increasing the size of the deficit by holding total spending constant.
This is not the time for the Biden Administration to propose $5 trillion or more in additional government spending.
Listen up government leaders. Stop stimulating an already over-stimulated economy.