This is a strange moment for the U.S. economy.
Unemployment is still high, but companies are complaining they can’t find enough workers. Prices are shooting up for some goods and services, but not for others. Supply-chain bottlenecks are making it hard for homebuilders, automakers and other manufacturers to get the materials they need to ramp up production. A variety of indicators that normally move more or less together are right now telling vastly different stories about the state of the economy.
Most forecasters, including policymakers at the Federal Reserve, expect the confusion to be short-lived. They see what amounts to a temporary mismatch between supply and demand, brought on by the relatively swift ebbing of the pandemic: Consumers, flush with stimulus cash and ready to re-engage with the world after a year of lockdowns, are eager to spend, but some businesses lack the staff and supplies they need to serve them. Once companies have had a chance to bring on workers and restock shelves — and people have begun to catch up on long-delayed hair appointments and family vacations — economic data should begin to return to normal.
But no one knows for sure. It is possible that the pandemic changed the economy in ways that aren’t yet fully understood, or that short-term disruptions could have long-lasting ripple effects. Some prominent economists are publicly fretting that today’s price increases could set the stage for faster inflation down the road. Historical analogues such as the postwar boom of the 1950s or the “stagflation” era of the 1970s provide at best limited insight into the present moment.
“We can’t dismiss anything at this point because there’s no precedent for any of this,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a forecasting firm.
On Friday, the Labor Department will release its monthly snapshot of the U.S. labor market. Last month’s report showed much slower job growth than expected, and economists will be watching closely to see whether that disappointment was a fluke. But don’t expect definitive answers. A second month of weak job growth could be a sign of a faltering recovery, or merely an indication that the temporary factors will take more than a couple of months to resolve. A strong report, on the other hand, could signal that talk of a labor shortage was overblown — or that employers have overcome it by bidding up wages, which could fuel inflation.
To get a clearer picture, economists will have to look beyond their usual suite of indicators. Here are some things they will be watching.
Consumer prices rose 4.2 percent in April from a year earlier, the biggest jump in more than a decade. But the largest increases were mostly in categories where demand is rebounding after collapsing during the pandemic, like travel and restaurants, or in products plagued by supply-chain disruptions, like new cars. Those pressures should ease in the coming months.
What would be more concerning to economists is any sign that price increases are spreading to the rest of the economy. Researchers at the Federal Reserve Bank of San Francisco studied sales patterns from early last year to categorize products and services based on the pandemic’s impact. Their Covid-insensitive inflation index so far shows little sign of runaway inflation beyond pandemic-affected areas.
Economists will also be watching other, less pandemic-specific measures that likewise aim to discern the signal of inflation amid the noise of short-term disruptions. The Federal Reserve Bank of Cleveland’s trimmed-mean C.P.I., for example, takes the Labor Department’s well-known Consumer Price Index and strips away its most volatile components.
“What we’re looking for is what does underlying inflation look like,” said Ellen Zentner, chief U.S. economist at Morgan Stanley.
For those looking for a simpler measure, Ms. Zentner offers a shortcut: Just look at rents. The rental component of C.P.I. (as well as the “owner’s equivalent rent” category, which measures housing costs for homeowners) is the largest single item in the overall price index, and should be less affected by the pandemic than some other categories. If rents start to rise rapidly beyond a few hot markets, overall inflation could follow.
2. Inflation Expectations
One reason economists are so focused on inflation is that it can become a self-fulfilling prophecy: If workers think prices will keep rising, they will demand raises, which will force their employers to raise prices, and so on. As a result, forecasters pay attention not just to actual prices but also to people’s expectations.
In the short run, consumers’ inflation expectations are heavily affected by the prices of items purchased frequently. Gasoline prices weigh particularly heavily on consumers’ minds — not only do most Americans have to fill up regularly, but the price of gas is displayed in two-foot-tall numbers at stations across the country. Economists therefore tend to pay more attention to consumers’ longer-run expectations, such as the five-year inflation expectations index from the University of Michigan, which recently hit a seven-year high.
Forecasters also pay close attention to the expectations of businesses, investors and other forecasters. Many economists pay particular attention to market-based measures of inflation expectations, because investors have money riding on the outcome. (One such measure, derived from the bond market, is the five-year, five-year forward rate, which forecasts inflation over a five-year period beginning five years in the future.) The Federal Reserve has recently begun publishing a quarterly index of common inflation expectations, which pulls together a variety of measures. It showed that inflation expectations rose in the first quarter of this year, but remain low by historical standards.
Restaurants, hotels and other employers across the country in recent months have complained that they cannot find enough workers, despite an unemployment rate that remains higher than before the pandemic. There is evidence to back them up: Job openings have surged to record levels, but hiring hasn’t kept up. Millions of people who had jobs before the pandemic aren’t even looking for work.
Many Republicans say enhanced unemployment benefits are encouraging workers to stay on the sidelines. Democrats mostly blame other factors, such as a lack of child care and health concerns tied to the pandemic itself. Either way, those factors should dissipate as enhanced unemployment benefits end, schools reopen and coronavirus cases fall.
But not all workers may come rushing back as the pandemic recedes. Some older workers have probably retired. Other families may have discovered they can get by on one income or on fewer hours. That could allow labor shortages to persist longer than economists expect.
The simplest way to track the supply of available workers is the labor force participation rate, which reflects the share of adults either working or actively looking for work. Right now it shows plenty of workers available, although the Labor Department doesn’t provide breakdowns for specific industries.
Another approach is to look at the ratio of unemployed workers to job openings, which provides a rough measure of how easy it is for businesses to hire (or, conversely, how hard it is for workers to find jobs). Data from the Labor Department’s Job Openings and Labor Turnover Survey comes out a month after the main employment report, but the career site Indeed releases weekly data on job openings that closely tracks the official figures.
Both those approaches have a flaw, however: People who want jobs but aren’t looking for work — whether because they don’t believe jobs are available or because child care or similar responsibilities are keeping them at home temporarily — don’t count as unemployed. Constance L. Hunter, chief economist for the accounting firm KPMG, suggests a way around that problem: the number of involuntary part-time workers. If companies are struggling to find enough workers, they should be offering more hours to anyone who wants them, which should reduce the number of people working part time because they can’t find full-time work.
“The data is not necessarily going to be as informative as it would be in a normal recovery,” Ms. Hunter said. “I would not normally tell you coming out of a recession that I’m going to be closely watching involuntary part-time workers as a key indicator, but here we are.”
Wage growth remained relatively strong during the pandemic, at least compared with past recessions, when low-wage workers, in particular, lost ground. Many businesses that stayed open during last year’s lockdowns had to raise pay or offer bonuses to retain workers. Now, as the pandemic eases, companies are raising pay again to attract workers.
The question is whether the recent wage gains represent a blip or a longer-term shift in the balance of power between employers and employees. Figuring that out will be difficult because the United States lacks a reliable, timely measure of wage growth.
The Labor Department releases data on average hourly earnings as part of its monthly jobs report. But those figures have been skewed during the pandemic by the huge flows of workers into and out of the work force, rendering the data nearly useless. Economists are still watching industry-specific data, which should be less distorted. In particular, average hourly earnings for nonsupervisory leisure and hospitality workers should reflect what is happening among low-wage workers.
A better bet might be to wait for data from the Employment Cost Index, which is released quarterly. That measure, also from the Labor Department, tries to account for shifts in hiring patterns, so that a rush of hiring in low-wage sectors, for example, doesn’t show up as a decline in average pay. It showed a mild uptick in wage growth in the first quarter, but economists will be paying close attention to the next release, in July.
5. Everything Else
The indicators mentioned above are hardly a comprehensive list. The Producer Price Index provides data on input prices, which often (but not always) flow through to consumer prices. Data on inventories and international trade from the Census Bureau can help track supply-chain bottlenecks. Unit labor costs will show whether increased productivity is helping to offset higher pay. Economists will be watching them all.
“During normal times, you can just track a handful of indicators to know how the economy is doing,” said Tara Sinclair, an economist at George Washington University who specializes in economic forecasting. “When big shifts are going on, you’re tracking literally hundreds of indicators.”