Editor’s note: An Associated Press story this week took a deep dive into the nation’s jobs environment. Why has employment remained so healthy even as the Federal Reserve has sought to slow the economy by raising interest rates? WRAL TechWire shared the AP story with N.C. State economist Dr. Mike Walden and asked for his analysis. The package of stories in this week’s “deep dive” feature.


RALEIGH – The “painful medicine” of higher interest rates administered by the Fed has not resulted in a surge of unemployment due to three factors unique to the current business cycle.

One – which is highlighted by the AP story – is the disruptions created by “supply chain problems” during and after the pandemic.  As these problems have been solved, supplies of products have returned to near normal, thereby creating jobs and putting downward pressure on prices.  As a result, the Fed has not needed to increase interest rates as much to achieve the desired moderation in the inflation rate.

Mike Walden (NCSU photo)

A second factor is the unique development of labor shortages as the pandemic recovery occurred.  Standard economic models would have predicted a surge in hiring after the short – but deep – Covid recession of 2020.  Yet due to continuing fears of personal interaction as well as the substantial financial assistance provided by the federal government during and after the pandemic, labor force participation recovered very slowly.  Some employers are still coping with labor shortages, and others still remember the trauma of not being able to hire workers.   These memories of labor shortages are causing businesses to be reluctant to cut jobs even if economic conditions would suggest cuts.  Hence, the labor market has remained relatively strong even as the Fed has raised interest rates to slow the economy.
The third factor preventing the economy from following the standard script of a recession created by Fed “tightening” is the on-going resilience of consumer spending.  Part of this has been due to  “pent-up demand” by consumers who had their spending restricted for almost two years.  Another part was due to the massive federal financial assistance ($5.5 trillion) which provided money for consumer spending once the economy re-opened.
Each of these impacts were unique to the current economic cycle, and together they have increased the possibility of a “soft landing” (no recession as the inflation rate is cut) in the economy.  One worry I have is on the third factor.  Consumers have now run through the trillions in financial assistance they received, and many households are borrowing to maintain spending.  This is ultimately not sustainable and could, at some point, cause the economy to stop and then go in reverse.
Bottom line:  Covid is still impacting people and the economy, and as a result, standard economic forecasts have not been accurate.

Inside US jobs numbers: ‘Progress without higher unemployment, for now’