Inflation Not

April 4, 2021

by Steve Stofka

I will keep this short on Easter weekend. The March Labor report that came out two days ago surprised to the upside, but I am not convinced that this will be a robust recovery this year. The relief act passed a month ago may give the kick needed. Despite the inflation warnings of some, the employment trends don’t signal inflationary pressures this year.

The unemployment rate declined from 6.8% at the end of last year to 6.2% at the end of March. However, the rate is still 1.7% above the 4.5% long-term natural rate of unemployment, an estimate of what the unemployment rate could be if available labor and other resources were employed. A year ago, the unemployment rate stood at 3.8%.

The labor force shrank by .2% this past quarter, about the same as the last quarter of 2017 and the 3rd quarter of 2015. Considering there is a pandemic, that shouldn’t be worrisome, but it is unusual for the labor force to shrink in the first quarter of the year. The last time was in 2011, a time when it seemed there might be another global recession. It’s not a sign of a robust recovery.

Total Employment is still 4.5% below last March, but Construction employment is only 1.2% down from last March. Even though Construction is only 5% of employment, it’s direction signals positive secondary movements in the economy.

There is a formula economists use to estimate the output gap in the economy. When it is positive, that signals some degree of inflationary pressures. When negative, as it has been for most of the past decade, that signals low inflation. We won’t get the first estimate of first quarter GDP for a few more weeks, but the employment data this past quarter estimates a small positive gap and little inflation.

Happy Easter, folks, and stay safe!

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Photo by Sebastian Staines on Unsplash

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