Economists tackle a U.S. economic mystery: so many jobs, so little growth

There’s currently a large disconnect between U.S. jobs numbers and GDP data: while the labour market is rolling, economic output has been weak.

In a new report, economists at CIBC World Markets see output catching up in the second half, and the labour market cooling next year.

According to the report, the divergence between labour markets and the overall economy this year is striking and uncommon.

“Anyone using the impressive trend in jobs to assess what real GDP would do has been stunned by two quarters of negative growth in the first half of 2022, while those relying on the output trend to predict hiring have underestimated monthly payrolls counts,” the report said.

“Even with the benefit of 20-20 hindsight, it’s hard to comprehend how so many Americans have been hired with nothing to show for it in output growth.”

One explanation is that average labour productivity has dropped recently — likely reflecting some of the effects of the pandemic.

In the early days of the pandemic, certain low-productivity sectors (restaurants, hotels) saw activity drop altogether, and others (retail sales, banking) shifted online, raising average productivity.

More recently, as public health restrictions have been dropped and economic conditions have returned to normal, the emergence of low productivity reflects a reversion to trend.

“One possibility, then, is that the weakness in first half GDP relative to employment was driven by the creation of so many low-productivity services jobs as consumers tried to ignore Covid and return to their prior activities,” the report said.

“If so, we might still have a bit more to run in that direction in Q3, as we’re still completing the recovery in consumer services relative to goods.”

At the same time, supply chain disruptions may have undermined productivity in sectors such as transportation and warehousing that have reported weak productivity this year, it suggested.

Recent economic data may have been somewhat misleading, too, the report noted.

“Real GDP might not have been quite as bad as advertised in the first half of the year, and hiring might not have been as brisk as the payrolls data would have you believe,” it said. “Alternative measures for both of these indicators suggest that the gap between the two might be narrower than what we observe in the more commonly cited figures.”

Possible data discrepancies aside though, “we’re overdue for GDP growth to play catch-up at some point,” the report said.

Indeed, the bank’s economists are expecting 2.4% annualized real GDP growth in the third quarter.

Looking further out, the recent strength in employment is likely to weaken too.

“The Fed is committed to taking the steam out of the labour market, and if GDP and employment realign, that will see payrolls gains fall off sharply, and the jobless rate creeping up a bit next year,” the report said.