Inflation, jobs, and how to make sense of the post-pandemic economy

There’s no consistent story to tell about the economy right now. If you look at housing, everything’s a disaster. If you look at consumer spending, everything’s plugging along. If you look at the labor market, things are looking pretty phenomenal.

“There seem to be three different economies out there,” said Ethan Harris, global economist at Bank of America, in an interview. “You’ve got a housing market in recession, you’ve got a consumer who’s hanging in, and then you’ve got a hot labor market.”

The economy has been a bit of a conundrum to unpack for a while now, after the pandemic tossed multiple segments into disarray across the globe. In the United States, there was a quick but deep recession as millions of workers were laid off, businesses were shuttered, and the economy ground to a halt. The subsequent rebound has been unpredictable, to say the least. (Remember the lumber shortage? What about when nobody could find dumbbells?)

The stock market soared throughout much of 2020 and 2021, only to sputter in 2022. Supply chain disruptions have eased, though the system remains far from perfect. Plenty of parts of the economy are quite robust, but everyone feels terrible about it anyway. Even so, many consumers are spending through it.

High inflation, which many policymakers hoped would be temporary, has stuck. The housing market that was booming until recently is now slowing due to the Federal Reserve’s interest rate hikes meant to curb inflation. There are now real fears that those efforts will lead to a recession, as they have in the past. Still, a major economic contraction doesn’t appear to be here — yet.

“I’m going to courageously go out on a limb and say we’re 50/50 on a recession,” joked Jason Furman, an economist and former chair of the Council of Economic Advisers under the Obama administration, in an interview.

It’s the type of prediction that sounds like a cop-out but is probably an honest reflection of the times: Multiple parts of the economy have gone a little haywire, and it’s not clear which of the normal rules apply and to what extent. Endless kinks — induced by the pandemic, Russia’s war in Ukraine, and continuing Covid shutdowns in China, among other factors — are still appearing and being worked out. It’s uncertain as of yet what might be a permanent dent.

Consumers and workers, policymakers and economists are all trying to put together the same economic puzzle with some pieces that just don’t fit. In the background lurks a sneaking sensation that everything in the economy that is going well could soon turn negative, especially if the Fed gets its way. It has indicated it might lighten up somewhat soon, but nothing’s for sure. That feeling of precarity is impossible to shake.

“It’s kind of like we’re in a china shop,” Claudia Sahm, founder of Sahm Consulting and former Fed economist, told me in a recent interview. One false move and the whole thing comes crashing down.

Nothing in the economy makes sense anymore because nothing has made sense for a while.

The economic arrows are pointing kind of everywhere

Generally, multiple parts of the economy move together. Different indicators, such as GDP (gross domestic product), income, employment, and industrial production, weaken at the same time ahead of a recession, or they strengthen when a recovery is underway. In this moment, that’s not the case, and distinct data points send a total picture of mixed signals.

Manufacturing output and industrial production are relatively flat, and factory activity has declined somewhat. Labor productivity during the first part of the year inexplicably plummeted, though it’s started to pick up some. Employment, on the other hand, has consistently continued to rise, with the US economy adding 263,000 jobs in November and wages continuing to rise. The number of job openings remains high. Inflation is cutting into wage growth, but wages are still rising, especially for people at the lower end of the income spectrum. New vehicle sales appear to be slowing as higher interest rates take their toll, but it’s nowhere near the toll those same higher interest rates have taken on the housing market.

“The labor market is lagging the broader slowdown due to record job openings coming into the year. The consumer is hanging in due to the still hot job market and massive excess savings. Service spending is solid in part due to pent-up demand left over from the shutdowns. The legacies of the Covid shock and record fiscal stimulus continue to be felt,” Harris wrote in a mid-November research note at Bank of America. “Put it all together and the lags from Fed policy tightening to the economy are even longer and more variable than normal.”

Different economists have different explanations for — or at least theories on — what is going on, but most acknowledge there’s no succinct, obvious explanation.

“Normally, you’d have everything going down together, but we don’t,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “The pandemic separated supply and demand in a manner that I’ve never seen before.”

Just take a look at the auto industry: more people wanted cars, new and used, during much of the pandemic. Those cars were nowhere to be found thanks to supply chain issues and other abnormalities. Something similar happened in the lumber industry. People took up home improvement projects and started building more housing in 2020. But the supply side at the start of the pandemic assumed the opposite would happen and slowed down production, and once they realized the pandemic-induced pickup in demand was happening, they were slow to ramp up.

Paulsen said that, now, the economy has, in a way, been “scared into conservative behaviors” because business and consumer confidence is so low and everyone’s worried about a slowdown on the horizon. “There’s been a lot of fear in this thing,” he said.

Furman acknowledged there’s “more of a sense that anything can happen than would normally be the case,” though he still tries to use standard economic relationships to figure out what’s most probable, even if he’s not at all certain they’re correct. “The biggest mystery of the past year has been how output’s been flat and employment rose, so there’s this disconnect between what employers are doing and how much companies are producing,” he said, noting that another disconnect is that “inflation is just a lot higher than what you’d think just from the unemployment rate alone.”

Not to be cliché here, but it really is the case that so much that’s happened over the past three years has been completely unprecedented. If we’d known a global pandemic was on the horizon in 2020, we’d all have probably had a lot more fun in 2019. That irregularity is what’s making it so hard to understand what’s going on now; there are so many new factors in the equation that the previous rules of the economic math might not entirely add up or apply.

“If you’d told me the price of cars had skyrocketed the way it did, or the fact that we had significant inflation of goods that basically reversed several decades of deflation in 2019, if you told me that was coming in the next couple of years, I would not believe you,” said Mike Konczal, director of macroeconomic analysis at progressive think tank the Roosevelt Institute. “I would have assumed a lot of crazy things would have happened for that to be true, and a lot of crazy things did happen.”

Everybody’s got a case of the economic icks

Plenty of parts of the economy are quite robust, but everyone feels terrible about it anyway. The University of Michigan’s consumer sentiment index has rebounded somewhat from its lows earlier this year, but it’s still well below where it was in the depths of the pandemic.

Even so, many consumers are still spending through inflation and even their own negativity. The mix of spending has changed — shifting more away from goods and back toward services — but it’s still happening.

Heading into the holiday season, it appears sales on Cyber Monday, which follows Thanksgiving, have hit a new record. Online sales on Black Friday hit a new record, too.

“It’s been amazing that consumer sentiment is just incredibly low, it’s like depths-of-the-financial-crisis low, it’s way worse than it was when the economy shut down due to Covid, and that’s not being reflected in people’s spending, which remains quite healthy,” Furman said. “There’s this disconnect between people saying negative things and not acting in a very negative manner.”

Furman also pointed to the results of the 2022 midterm elections as evidence that the way people are feeling about the economy and the way they’re acting is a little off. As a general rule, the party in power tends to do poorly in midterm elections, and especially given the state of inflation and gas prices (which have been very high but are now coming down some) heading into Election Day, many pollsters and pundits assumed the Democrats were doomed. But the “red wave” many anticipated did not appear. Republicans took the House of Representatives, while Democrats maintained control of the Senate.

As Vox’s Christian Paz noted, early exit poll data showed that most voters said they felt the economy was “not so good” or “poor” but also said that inflation was a moderate hardship on their families or not a hardship at all. “That suggests that even with near-record high inflation, voters were willing to consider other factors in their voting decisions — and not everyone cared to connect the economy to their vote for a Democrat or against a Republican,” Paz wrote.

Still, there’s no denying people feel quite bad about the economy, even if many segments of it are quite good. Ultimately, inflation has “canceled out” the good labor market, Konczal said — you can’t tell people the economy is good and to appreciate how many jobs there are. “People can’t eat job openings if their food budget has gotten a lot smaller,” he said.

Where the economy is headed, nobody knows

To be clear, the economy isn’t some impossible black box; there are plenty of things that are known.

The global economy, overall, is slowing. Inflation remains higher than it’s been in decades. In the US, monthly job growth has averaged hundreds of jobs a month. The Fed is trying to bring down inflation by raising interest rates multiple times this year. The expectation is this will lead to a slowing in the labor market that, thus far, hasn’t happened.

Harris told me he thinks the “three economies” he identified moving in different directions “are all going to turn weak because it’s just a matter of time with what the Fed is doing.”

The hope is the Fed’s efforts lead to a soft landing, meaning it’s able to cool the economy off without pushing it into a full-blown recession, but a recession risk isn’t off the table by any means. The Fed has indicated it’s taking into account the cumulative effects of its actions and that it’s aware there will be lags to those effects. Still, Fed Chair Jerome Powell has been clear he is focused on bringing inflation down.

“Without price stability, the economy does not work for anyone,” Powell said in a speech in August. “In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”

Konczal said it’s “incredibly unclear” where the Fed goes next after it again raises interest rates in December. Its target for inflation is 2 percent, which is well below the 7.7 percent annual rate it was in October. But what if it comes down to, say, 3 percent or 4 percent? “There’s a question of whether you really want to hurt a lot of people to get inflation back down to 2 percent, which is a fake number, it is an arbitrary number,” he said.

In late November, Powell acknowledged he and his colleagues did not want to “overtighten” and that they might slow the pace of interest rate hikes as soon as December, comments that heartened markets. But he also said the fight to get inflation under control isn’t over: “Despite some promising developments, we have a long way to go in restoring price stability.”

There’s also much that’s out of the Fed’s hands, in terms of what impacts the economy. Russia’s ongoing war on Ukraine and China’s approach to Covid continue to weigh as well. And if the last three years have taught us anything, it’s that we have no idea what else could be around the corner.

Moreover, it’s not clear how many of the changes the economy has seen over the past year are temporary or what’s permanent. The push under the Trump and Biden administrations to build more in America marks a shift against globalization and toward more domestic sourcing and production. “The era of globalization is definitely over,” Konczal said. “It looks like our trade policy is going to be much more focused on building core industrial capacity in the United States, notably on things like green energy.”

Employers also remember how hard it has been to hire people and keep them on over the past few years, which may make them more hesitant to let them go now — though, as we’ve seen with the massive tech layoffs, that’s not true across all industries. With the Fed raising interest rates and otherwise tightening monetary policy, the era of easy money is over, at least for now. That has contributed to what looks like the end of the big tech boom and a slowdown in the still volatile crypto market, and it is clearly weighing on the overall markets.

I’ve said it before and I’ll say it again: Anyone who says they know exactly what is going on in the economy is lying. The same goes for anyone who says they know for sure where the economy is headed. Under all of the old rules, some things don’t make sense right now, and it’s not clear if it will all ever make sense again.

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