How Weaker Consumer Demand Could Help the U.S. Economy

(Bloomberg Opinion) -- As concerns multiply about weak consumer demand, so have projections for a reduction in U.S. economic growth. But a brief pullback in consumer spending could give the U.S. economy just the room it needs to adjust.

To be clear, the root cause of the slowdown — the rise of the delta variant of Covid and an accompanying increase in hospitalizations — is indisputably tragic. Declining government support and greater demand for services relative to goods are also factors in downgraded forecasts.

Over the past few months, the global outlook has taken on a superficial resemblance to one of the most dreaded of all economic conditions: stagflation. Prices on goods have been rising rapidly, while job growth has slowed to a crawl.

Just as worrying, long-term pressures on inflation seem to be increasing, especially for housing, which accounts for almost third of the consumer price index. Yet there is little compensatory increase in residential construction or the jobs associated with it.

Lest things seem too pessimistic, it’s important to point out a crucial difference between the stagflation of the 1970s and today. Half a century ago, slack in the labor market was rising and workers were finding it ever harder to secure new employment. That’s precisely the opposite of the present situation.

Fundamentally, that means that the sense of despair that marked the ’70s — made famous by the so-called misery index, which combines the inflation rate and the unemployment rate — is unlikely to reappear. Instead, the worry is that today’s conditions will lead to a fundamental shift in the U.S. economy that will leave some workers behind.

The frustrating truth is that no one knows precisely why employers are having such a hard time filling vacancies when overall employment remains well below its pre-pandemic trend. But since markets abhor a shortage, pressure on employers to raise wages is steadily rising.

That may be a good thing for workers who already have a job. Less clear is how it will affect the millions of Americans who were working before the pandemic but aren’t now. If wages rise too sharply, vacancies could start to decline as employers decide that it’s too expensive to expand their workforce.

Some businesses will turn to automation. Others may decide to raise prices and settle for less volume. In either case, the window for re-employing everyone who lost their job during the pandemic would begin to close.

Economists such as David Autor have suggested that’s not such a bad thing, because many of those workers have decided they’d rather spend more time with their families than work in low-wage jobs. I hope he’s right, but I suspect that other factors are at work, such as a lack of child care. And even if his hypothesis is correct, many of those workers may eventually decide to they want or need to return to work.

What those workers could use, in effect, is more time — and that’s precisely what a more slowly growing economy would give them. Slightly slower demand would also give businesses the incentive to hold out a little longer before bidding up wages or raising prices.

It may also result in consumers spending down their savings more slowly, consequently giving them more buying power in 2022. In fact, in a report released Monday that predicted slower growth for this year, Goldman Sachs projected a slight increase in the U.S. economic growth rate for 2022. With more consumer demand and less wage competition, employers should still be willing to snap up those newly available employees.

Slowing growth amid rising prices is always disconcerting. This time, however, due to the peculiar conditions of the U.S. labor market, it may come with a silver lining: longer-lasting job openings, and more time for workers to consider them.

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

Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.

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