US Jobs Growth Is Robust, But Labor Productivity Is Tanking

U.S. GDP has declined for the first two quarters of 2022, an economic indicator that typically corresponds with a recession. Federal Reserve Chair Jerome Powell and others have argued the U.S. labor market is too strong for the economy to be in a recession.

Labor Productivity Paradox: On Monday, Bank of America economist Aditya Bhave said GDP growth in the first half of 2022 was likely higher than initial estimates, but U.S. economic output is clearly growing much more slowly than employment in the current climate.

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As a result, U.S. labor productivity has dropped sharply this year, a trend that Bhave said could be a mixed signal about what investors can expect next.

He says there has historically been a very high correlation between GDP growth and gross domestic income (GDI) growth. Given the two measures diverged in the first half of the year, investors should expect convergence in the second half of the year.

Bhave said U.S. employment growth will slow and/or GDP growth will accelerate.

“In the latter scenario, the Fed could hike beyond 4%, raising the risk of a deep recession down the line,” he said.

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Rising Rates: As of Monday morning, the bond market is pricing in just a 27.7% chance the Fed’s target interest rate will rise to at least between 4% and 4.25% by March 2023, according to CME Group.

Bhave said the worst-case scenario may be that an overheating U.S. labor market would trigger further demand-driven inflation, even as supply constraints ease.

In this scenario, he said a so-called “soft landing” for the economy may be nearly impossible for the Fed to achieve.

Benzinga’s Take: The next round of inflation and labor market data for the month of August will be critical in determining whether investors should expect a 0.5% rate hike in September or a third consecutive 0.75% hike from the Fed.

The SPDR S&P 500 ETF Trust (NYSE:SPY) is down 5.5% since Aug. 15, suggesting investors have become increasingly concerned about the U.S. economic outlook.

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