Friday’s highly anticipated U.S. jobs report sheds light on a crucial question for the economy: How much more can the Federal Reserve do to stimulate growth and push down unemployment before it runs into undesirable inflationary consequences?
Economists have long been engaged in a discussion about the nature of unemployment in the U.S.: Is it more short-term and cyclical, or is it more structural and long-term? In the former case, accelerating growth can bring the unemployment rate back down to where it was before the crisis. In the latter case, the “natural rate” of unemployment would be higher, impairing the economy’s ability to create jobs and grow without stoking inflation beyond the asset markets.
Until recently, the debate was largely academic: Given the depth of the economic downturn, everybody recognized that there were lots of jobs to recover before unemployment fell anywhere near its natural rate. Moreover, with political polarization on Capitol Hill undermining a comprehensive policy response, there wasn’t much interest in figuring out how the natural rate itself could be improved.
Now, though, the question is gaining urgency. The widely followed U-3 unemployment rate has fallen to 6.3 percent, down from a 2009 peak of 10 percent and approaching — albeit frustratingly slowly — the pre-crisis low of 4.4 percent. Yet economists have yet to agree on a threshold beyond which inflation (outside the asset markets) might become a problem. Nor have they converged on a narrative about an important determinant of job creation — the level and composition of economic growth.
One group is quick to point to bad weather as the major cause for slow growth and sluggish job creation this year. They predict a sharp and relatively quick growth rebound, supported by evidence that underlying financial conditions are gradually improving. Another group is a lot more cautious. They believe that the U.S. faces secular headwinds that are consequential and durable, especially if Congress continues to dither in performing its economic governance responsibilities.