It needs to be emphasized, of course, that this historical relationship is not that strong a guide in a very rapidly growing economy and that the inevitable delays in restarting and setting up businesses could delay this hiring. Conversely, however, the industries that have seen the largest job loss should be relatively easy to restart. If a restaurant was doing a booming business at the corner of Washington and Main before the pandemic, it should be able to do a booming business in its wake and, whether the establishment is being run by its old owners or by new owners, the need to quickly hire cooks and wait staff will be obvious.
This strong job growth could have an amplified impact on the unemployment rate because of weak growth in the working age population. Census Bureau projections suggest that, assuming normal net immigration patterns of just over 1 million immigrants per year, the U.S. population aged 18-64 would have grown by roughly 0.2% per year in 2020, 2021 and 2022. However, visa statistics confirm that immigration has collapsed during the pandemic and is unlikely to return to normal until the pandemic is over. Because of this, it is reasonable to assume that, even with re-entrants to the labor force from the most affected industries, the labor force by the second quarter of 2022 may be no higher than it was in the fourth quarter of 2019.
This is where the math gets interesting. As noted earlier, the labor force is currently roughly 4 million people lower than it was at the end of 2019. However, starting with today’s unemployment rate of 6.7%, adding 10 million jobs to the economy and 4 million people to the labor force cuts the unemployment rate to 2.8%.
Of course, the unemployment rate is very unlikely to fall this low. A scarcity of workers would likely boost wage growth and slow hiring. Immigration might ramp up faster and the availability of good-paying jobs could lure retirees back into the job market. However, the exercise is useful because it re-emphasizes the potential for the combination of pandemic recovery and massive fiscal stimulus to overheat the economy.
For policy makers, it will be important to watch the pace of improvement, and be willing to tighten policy as the economy approaches full employment. However, there is little reason to believe that politicians with an eye to the 2022 mid-term elections will be in any mood to embrace tax increases or spending cuts. In addition, as Jay Powell made very clear in his post-FOMC press conference last week, the Fed has no intention of tightening policy prematurely and could regard a rise in inflation as the pandemic ends as being purely transitory in nature.
For investors, given the potential for economic acceleration and the reluctance of policy makers to apply the brakes in good time, risks remain tilted towards higher inflation and long-term interest rates in the year ahead. Even in today’s slow economy, it is worth making sure that portfolios are well positioned for faster times ahead.
David Kelly is chief global strategist at JPMorgan Funds.