By Manfred W. Keil and Robert A. Kleinhenz | Economic Partnership of the Inner Empire

In the past, the health of the economy could be broadly assessed by looking at three indicators of economic well-being: the rate of inflation, the rate of unemployment, and the rate of growth of gross domestic product. Although these continue to produce important vital signs, the signals are mixed for these measurements during the recovery period. At times like these, you have to look beyond the “big picture” numbers to get a better idea of ​​how the economy as a whole is going.

If you want to scare economists and politicians before Halloween, just use the word “stagflation”. Stagflation is a combination of stagnation and inflation, a phenomenon last seen in the 1970s.

Inflation is usually associated with high demand and a booming economy, but in this case it refers to inflation while the economy is stagnating. This was caused then by a supply-side shock in the form of OPEC oil price increases – just as we are seeing supply-side shortages today, not only due to rising oil prices, but also supply chain issues elsewhere in the world.

It is true that the GDP estimates for the third quarter are well below the growth rates of the last quarters, if not than those forecast a few months ago. But GDP fully recovered from the spring 2020 pandemic shutdown earlier this year, as the economy posted growth rates rarely seen in nearly 40 years (aside from the 33.8 % in the third quarter of 2020, economic activity hardly ever increased by more than 6.5% in any given quarter). The speed of the recovery has been aided by massive and unprecedented stimulus support from the federal government to the private and public sectors.

Now is the time for the economy to wean itself from this life support to self-sustaining growth. It won’t happen overnight, and the disruption from the pandemic has wreaked havoc in many areas of the economy: supply chains, the leisure and hospitality industry, and office jobs. .

Looking at the components of GDP, the composition of consumer spending shifts from goods to services. However, the delta variant tempered this movement. Meanwhile, supply chain disruptions have limited the consumption of goods to the point that President Joe Biden has ordered the Port of Los Angeles to introduce 24/7 working hours. At the same time, uncertainty over the future of office work has triggered a succession of sharp quarterly declines in investment in non-residential structures. Since the start of the year, significant inventory corrections have also taken place, which further slowed economic growth. Finally, the slow recovery in some of our major trading partners tempered US exports and limited its contribution to growth. In the future, as coronavirus vaccination rates increase, consumption of services will accelerate, workers will gradually return to the workplace, and our business partners will increase purchases of our exports.

The labor market and employment in industry are also sending mixed signals. On the one hand, the US unemployment rate fell to 4.8%, which is still above pre-pandemic levels of 3.9% but close to the assumed full employment level of 4.5%. by the Congressional Budget Office. In addition, the number of job vacancies exceeds the number of unemployed. These conditions normally occur much later in an expansion. On the other hand, wage job gains have slowed sharply over the past two months, again raising fears that the recovery is about to come to a halt.

But wait a minute. September’s job gains of 194,000 may seem disappointing compared to previous months, but they are still well above the average monthly gains recorded during the recovery from the Great Recession of 2008-09. The main reason for the slowdown in employment growth was poor performance in the leisure and hospitality industry. This sector was hit hardest in the first months of the pandemic, losing nearly half of its job base. Subsequently, it was also the biggest contributor to job gains until two months ago, when the delta variant resulted in the reinstatement of health protocols. If the delta variant had not limited growth in leisure and hospitality jobs in August and September, overall job gains would have been 600,000 rather than 200,000.

The gains in other sectors are just as significant. Of the 17 major private sectors we track, seven are within three percentage points of their pre-pandemic jobs, and three have already matched or surpassed those levels. The gains of these sectors should not be overlooked even when analyzing the hesitant recovery in leisure and hotels.

Inflation is another area of ​​concern. The 5.4% year-over-year inflation rate is the highest in three decades except for a single month – July 2008. Supply chain disruptions are currently contributing to significantly to inflation, as does labor market volatility. which manifested itself in the form of labor shortages in key sectors of the economy. These problems will take several months to resolve, but there is little reason to predict that we will see persistently higher inflation rates. For this to happen, workers would have to demonstrate higher wage bargaining power, as they did in the form of higher unionization rates in the 1970s, and companies should be able to use their profit margin capacity to increase prices based on unit labor. cost increases caused by wages. We don’t believe companies currently have this power and increases in productivity can dampen wage increases in higher unit labor costs. Finally, the Federal Reserve has established its credibility as an inflation fighter.

It helps if you look at the price increases in more detail. Food, energy and car prices are on the rise due to supply disruptions and labor shortages, but many other items in our consumer basket have seen more moderate price changes . Recent data on producer prices suggests that fluctuations in the prices of inputs and intermediate goods are easing.

The point is, when you look past the big numbers, you find that a large part of the economy is moving into the recovery phase. When it comes to GDP, employment growth and the inflation rate, when these sectors are taken into account, the picture of economic recovery is more encouraging.

Manfred W. Keil is Chief Economist, Inland Empire Economic Partnership, Director, Lowe Institute of Political Economy, Claremont McKenna College; Robert A. Kleinhenz, Inland Empire Economic Council, CEO, Kleinhenz Economics, Cal State Long Beach

The mission of the Inland Empire Economic Partnership is to help create a regional voice for business and quality of life in Riverside and San Bernardino counties. Its members include organizations from the private and public sectors.