NEW YORK — People keep saying that the U.S. Federal Reserve needs to cut interest rates, in large part to ward off the ill effects of the Trump administration’s trade wars.
But what about the job market? With unemployment already hovering near its lowest level in almost 50 years, would added stimulus make sense?
Maybe. Some new data even suggest that the job market could handle a boost, even if new tariffs don’t have much adverse effect.
U.S. employers have long been hiring at an impressive pace. During the past year, monthly nonfarm payroll gains have averaged 196,000, more than enough to compensate for natural growth in the labor force. The unemployment rate has declined from a very low 3.8 percent to an even lower 3.6 percent.
Wage growth has even improved after a long period of little growth. Average hourly earnings, as reported today by the Bureau of Labor Statistics, were up 3.1 percent from a year earlier in May, not far from the rate that prevailed before the last recession.
So why stimulate? First, there’s the obvious issue of Trump’s erratic trade policy. His penchant for surprises — such as his recent move to impose emergency tariffs on Mexico — has spread uncertainty, which could prompt businesses to pull back on hiring, send the unemployment rate up and even tip the economy into recession.
Job gains might already be slowing: Nonfarm payrolls grew by an estimated 75,000 in May, well below the longer-term average. Because monetary policy operates with a significant lag, now could be the best time for the Fed to act.
That said, even if fears of a slump are unfounded, there’s reason to believe that stimulus wouldn’t be a terrible move. Consider wages. Although they’re already increasing at a decent pace, they could do a lot more with little risk of triggering an inflationary spiral. That’s because productivity growth appears to be picking up — and the more workers produce per hour, the more companies can pay without increasing consumer prices.
As of March, workers’ output per hour was up an estimated 2.4 percent from a year earlier. If that pace persists, wages can safely grow at about the overall inflation rate plus 2.4 percentage points. (Assuming productivity growth is being measured accurately. Some have doubts.)
So if inflation hits the Fed’s 2 percent target, that’s 4.4 percent, well above the current pace of pay gains. Even using the Fed’s preferred measure of inflation, which currently reads 1.5 percent, the ceiling is 3.9 percent. Here’s how that looks:
Also, research suggests that increased demand for workers can still draw in people who remain on the sidelines of the labor market (and are hence not counted as unemployed). Even a decade after the economy last hit bottom in mid-2009, their numbers are significant. As of May, the labor force participation rate among prime-aged workers stood at 82.1 percent — about 1.3 percentage point, or 1.6 million workers, short of its pre-recession level. Here’s how that looks:
In short, it’s hard to see what damage a little stimulus would do.
Mark Whitehouse writes editorials on global economics and finance for Bloomberg Opinion. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was founding managing editor of Vedomosti, a Russian-language business daily. © 2019 Bloomberg Opinion.