7% Growth Looks a Lot Harder After the Jobs Report

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There's been a lot of optimism in the past few months that the U.S. economy would bounce back from the pandemic with a 7% growth spurt this year, boosted by the rollout of vaccines, fiscal stimulus and pent-up demand. It's one of the reasons why the S&P 500 closed Friday at an all-time high.

But just as most of the country was speeding into reopening, April's disappointing jobs report cast doubt over whether we'll be able to achieve those lofty growth forecasts. If the millions of workers who lost or left their jobs in 2020 don't rejoin the workforce this year, those 7% growth expectations will prove to be far too high.

Economic growth is basically a function of hours worked and productivity growth. One way to raise hours worked is to extend the work week, but that tends to be pretty stable: for non-managerial workers, hours worked has averaged between 33 and 34 hours a week for most of the past 20 years. The more common way to increase hours worked is via employment growth.

Productivity growth is the other factor — becoming more efficient through investment, innovation, or the workforce becoming more skilled.

Not surprisingly, there's a pretty close relationship over time between economic growth and employment growth. Between 1960 and 2020, real gross domestic product has grown at an average annual rate of 2.9% while employment has grown at an average annual rate of 1.6%, for a difference of 1.3% a year.

So for 2021, if we're going to hit those 7% economic growth forecasts, employment probably needs to grow by at least 5.5%, or 7.8 million jobs. That works out to 650,000 a month. Through April, we've added 1.8 million jobs, or an average 450,000 a month. In other words, we're behind the pace we need — and much of the boost from reopening the economy has already happened.

Debate has been focused on the reasons for April's surprisingly low numbers: was it because of supply chain issues curtailing economic activity, or enhanced unemployment benefits disincentivizing work, or a lack of childcare options and closed schools due to the pandemic? But we should also be thinking about the simple fact that it's bad news for the recovery if we can't sort out these labor market frictions.

One direct way supply-chain issues hurt employment in April was in the automobile industry, where a shortage of semiconductors has led to factory shutdowns. Perhaps unsurprisingly, employment in the production of motor vehicles and parts fell by 27,000 jobs for the month.

Even more concerning might be the price surge for lumber and other building materials, and what it might mean for housing construction and employment. Rick Palacios Jr. of John Burns Real Estate Consulting noted last week that homebuilders in multiple metro areas are pulling back on construction due to the high cost of building and fears that rising sales prices will eventually translate to fewer buyers. The demographics for housing are incredibly strong, but construction might take a breather for a few months to give the supply chain time to catch up, weighing on employment and economic growth.

We're not used to these sorts of challenges being the main risk to economic growth. For at least the past three economic cycles, dating back to the year 2000, slumps in demand — not shortages and supply-chain woes — have driven the shocks that rippled through the markets. From a markets standpoint, it's unclear to what extent investors can anticipate short-term slower growth being offset by faster growth in the medium term as supply comes back online.

Until Friday, we thought we might see a series of reports showing about a million jobs being created each month. To meet those forecasts for 7% growth, we'll need an average 750,000 jobs a month for the rest of the year, based on a 7.8 million employment target.

If the May report doesn't show at least 500,000 jobs created, we'll have to reassess just how fast supply will come back online, and whether the surging demand for both goods and services can be met with greater production, or if it's leading to higher prices and more unfilled orders.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.

©2021 Bloomberg L.P.

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