Editor’s note: Dr. Anne York is Program Director and Professor of Economics at Meredith College. WRAL TechWire asked Dr. York for her reaction and analysis of the upward revision in U.S. gross domestic product announced earlier Thursday.
RALEIGH – This upward revision to the 3rd quarter GDP shows that our economy is not slowing down in the way the Federal Reserve wants it to in order to slow down inflation.
One noteworthy part of this report from the Bureau of Economic Analysis is that the growth in GDP primarily came from the private services-producing industries, being led by professional, scientific, and technical services.
Growth in health care and retail and wholesale trade also contributed.
When real GDP is calculated, it is holding prices constant, so this increase is due to growth in the quantity of output. Service sector jobs depend on the available labor supply and since our labor force participation rates have not returned to their pre-pandemic levels, that is causing wages to rise, which causes businesses to raise prices.
If we can get more workers to join the labor market, that will then have a deflationary effect on wages and prices. Then the Fed would not have to continue to raise interest rates to slow down the economy and we would achieve that “soft landing” of a slower growing economy but with low inflation rates.
[Note: Government figures showed 10.3 million open jobs in the US as of Nov. 30, helping drive up competition – and wages – for workers.]
Why are we not seeing our labor market return to its pre-pandemic state?
[Note: The St. Louis Federal Reserve Bank reported a labor force participation rate of 62.1 percent in November. That’s down 5 percentage points since the summer of 2020 as the pandemic raged.]
There are a variety of reasons, from lack of child care keeping some mothers out of the labor market to earlier retirements.
The male labor force participation rate even has not returned to its pre-pandemic level. And there is evidence that some people do still fear catching COVID in the workplace, particularly in jobs with a lot of human interaction.
Until the labor force participation rate improves, I think that the Fed will continue to fight a losing battle that will end up causing too much harm to the economy as they continue to use a tool that decreases the demand for output.
We need to use fiscal policy tools that will support an increase in the supply of labor.