The Daily - A Strange Moment for the U.S. Economy

Episode Date: May 18, 2021

Why is the economic recovery from the pandemic so uneven? Why are companies finding it hard to hire? And why are the prices of used cars surging?Recent economic reports have commentators scratching their heads. We dig into the theories behind this strange moment for the American economy. Guest: Ben Casselman, an economics and business reporter for The New York Times. Sign up here to get The Daily in your inbox each morning. And for an exclusive look at how the biggest stories on our show come together, subscribe to our newsletter. Background reading: April’s anemic job creation was so out of line with what other indicators have suggested that it will take some time to unravel the mystery.The weak jobs report could help the Federal Reserve justify its patient approach to its policies. Officials have said that they want to see real, not just forecast, progress toward full employment and stable inflation.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today. Why is the economic recovery from the pandemic so uneven? Why are companies finding it so hard to hire? Why are the prices of used cars surging? Kevin Roos talked to our colleague, business reporter Ben Castleman, about this strange moment in the U.S. economy. It's Tuesday, May 18th.

Ben, hello. Kevin. You look great. Your hair is luxurious and pandemic-grown, and it's, you know, it's radiant. I'm finally almost ready to get a haircut, to shear off the COVID locks. Ben, you are my personal, I was going to say economics guru, but it's more like economics therapist, because I come to you when I'm very worried about something, and you explain patiently why I shouldn't be that worried about it. and you explain patiently why I shouldn't be that worried about it. And so lately, most of my questions have been essentially some version of like,

am I crazy here? Like, what is happening in the economy right now? You know, tons of people are obviously still struggling from the pandemic, but housing prices are going insane all over the country. People are getting rich on Dogecoin and other weird investments. Millions of people are still out of jobs, but there's also these weird labor shortages where businesses can't find enough people to work. I keep seeing things on Twitter about, like, the price of lumber being crazy. So, like, can you please just tell me what is happening and whether I should be storing money under my mattress? I can tell you not to store money under your mattress. That part's easy. Okay. That's a relief. No. So I will try to answer your questions as best I can, but I'm going to offer a warning

right up front here, which is that I have no idea what is happening in the economy right now. no idea what is happening in the economy right now. But Ben, if you have no idea, how are any of the rest of us supposed to have an idea? It is legitimately a really weird moment in the economy. And there is part of me that wants to say, check back here in six months, and I will tell you what has happened in the economy over this period. But we don't have the luxury of doing that, right? Because we're in the process of making economic policy and making economic decisions. And so we sort of have to react to the evidence as we see it in front of us. And I'll do my best to help guide you through that. But it is a tricky moment where there's a lot of uncertainty.

Oh, man, this is really, really worrying me. This is like when your therapist says, like, I can't do that for you. You have to do that. So when did your confusion about what's going on in the economy start? Like, is there a story of the moment where you just realized that, like, you didn't understand things anymore? I can tell you exactly when it started, which is Friday, May 7th at 8.30 in the morning. What happened then? What happened was we got the monthly jobs report. So let me step back and give a little bit of context here.

We've just come through this year where we all know we shut down the economy. We sort of gradually began to open it back up haltingly over the last year. And by the time we got to this spring, it really seemed like we were finally on a glide path back to health. More than 900,000 jobs added to the economy last month. That's the largest gain since August and well above what analysts were expecting. We saw some really strong job growth in March. And more and more people getting vaccinated every day. We'd seen vaccines rolling out. Finally today, more Americans are vaccinated and getting their shots faster than ever before. The rollout of the coronavirus vaccine is now fueling hopes that 2021 will see travel take off again.

We'd seen planes filling up again. We sort of knew that the economy was starting to reopen in a real way. That is some good news. A sign the recovery could be taking hold. knew that the economy was starting to reopen in a real way. That is some good news. A sign the recovery could be taking hold. And we thought that April was really going to be the proof of that. According to Dow Jones, economists are looking for a gain of about a million jobs in April. And that's what we all woke up on Friday morning expecting to see. This is like Christmas morning for econ reporters. Christmas morning,

but 12 times a year, Kevin. 12 times a year. Sounds incredibly exciting. Yeah, I mean, look, we're all still working from home right now. So like I'm in my apartment and my colleagues are all in their apartments and houses. And we're all looking for this big number, and the number comes out, and it says 266,000 jobs. That's it? A quarter of what we expected. And how shocking is that? I mean, what's the magnitude of the gap there? I mean, I think it was pretty shocking. Nobody's forecast was that low. And so what that told us right off the bat was

that this recovery, however it goes, is not going to go the way we all thought at 8.29 in that morning. So, Ben, with the caveat that, you know, you are not an all-seeing oracle and maybe don't understand everything that's going on in the economy right now, but that we can try to piece together some evidence. How do you make sense of these numbers? So there are really three theories. The first is in some ways maybe the most obvious, which is that maybe job growth was weaker than we expected in April because the recovery itself is weaker. Think about the economy right now as a car. We're trying to get back up to highway speeds. But maybe we're just kind of still on the access road here, right?

We're not ready to get on the highway. We're not ready to start bombing down at 70 miles an hour because we're still in a pandemic right now. We still can't do all of the things that we're used to being able to do. The problem with that theory is that there's a lot of other evidence that we're actually getting back to normal relatively quickly here. You know, people are getting on airplanes again in large numbers. People are going out to eat again, not at the numbers maybe that they were before the pandemic, but certainly growing very quickly. And of course, we saw pretty strong numbers in March.

So it's a little strange that we would kind of take this step backwards in April. It sort of seems strange that we would lose momentum at a moment when all of the other indications are that actually we should be gaining momentum. Got it. So that's the first theory. What's the second theory? And if possible, could you return to the metaphor of the car, because that was really helping me. Let's torture this metaphor for as long as we can here. So if the first theory is we're stuck on the access road, the second theory is actually we are getting up to speed. The economy is recovering really quickly, but we're in this, we're in a merge, a highway merge moment, right? And anybody who's merged

onto a highway at a busy time of day knows that that can be a tricky moment, right? You're trying to get over, you're trying to, you know, get up to speed quickly, you're trying to merge into traffic. It's tough to go from access road speed to highway speed. And maybe that's what we're basically seeing here, that a ton of businesses are trying to reopen quickly, they're trying to staff up quickly, they have a ton of people that they need to hire. Anybody who's hired before knows that even in normal times, it's tough to hire quickly. And so in this theory, the issue is not that the economy isn't ready to reopen. It's not that we're not ready to get back up to speed. It's just that it's tricky to get there. And it's just that it's tricky to get there. And it's going to be a couple of months of, you know,

pretty crazy numbers back and forth as we try to get ourselves back up to something normal. And then that's all going to flow through and we're going to be fine. Got it. So that's theory number two, the tricky merger. What's the third theory? So the third theory is that actually we're already on the highway. The economy has kind of emerged from most of its pandemic restrictions already,

but we are continuing to jam on that accelerator beyond what the engine can handle. That we are going to risk overheating the engine, overheating the economy, and ultimately end up in worse shape than if we backed off the accelerator and kind of allowed the economy to continue on its own path. So here's what that means in the real world. If we pump too much money into the economy all at once, then it risks basically overwhelming the system. When the economy is weak, when people don't have jobs and they don't have money to spend, then the standard economic approach is to give them money. You've got stores that have stuff on their shelves that they want

to sell, but they can't sell it right now because people don't have money to spend. And so we give them money and they spend it. They go and they buy and we spur economic activity. But if we're in a moment when the economy is already good, when factories are already producing as much as they can produce, when stores are already selling as much as they produce, then giving people money doesn't actually increase activity. It doesn't lead to more spending. It just leads to more competition to buy the stuff that's available, which ultimately just leads to higher prices, which means inflation. Got it. So what does this jobs report tell us about which scenario we're actually in? So the trick here is that these can be really difficult to tell apart, especially those last two scenarios. And the clearest example of this is the debate over the worker shortage.

Say more about the worker shortage. So if you talk to almost any business right now, especially businesses like restaurants and hotels and retailers, you hear them complaining that they can't find enough workers, which on the surface is a pretty surprising thing, right? The unemployment rate is a bit over 6% right now. That's down a lot from where it was last spring, but it's still definitely higher than we'd associate with a strong economy. There's still a lot of people who are out of work. And so it's pretty surprising that businesses would be saying,

I can't find workers. But we see a lot of evidence of this, at least in certain sectors. We see this showing up in different ways in the data. Right. I've seen the, you know, help wanted signs that show up on social media where it's a restaurant saying, you know, basically, we can't find enough people to work in the kitchen, so we're just going to close down for the time being. And so how would someone who believes in your second theory, the sort of tricky merge theory, how would they explain what's happening with worker shortages? Yeah, so their explanation would be, look, there are a bunch of things that are making it tough

for everybody to come back to work right away. So, for example, child care. I hear all the time from parents of young children that either schools aren't back in person or maybe schools or child care centers are open again, but really erratically, right? Everybody's got all these COVID protocols in place. And so one kid is sick and all of a sudden everybody's going to be home for the next week or they're at limited hours or only certain days. That makes it really hard to go back to work. Another would be the pandemic itself, the health concerns associated with it. You know, the data that we're talking about here, this jobs report, the data was collected in early to mid-April, which was

a moment at which a lot of Americans were kind of getting their first dose of the vaccine. But they weren't yet through, unless it was the Johnson & the vaccine, but they weren't yet through, unless it was the Johnson & Johnson, right? They weren't yet through their two doses or their two doses plus two weeks, right? So if you've been careful all year, you've been trying to avoid getting coronavirus, and you get the first dose of the vaccine, you may not rush back to work at that point, right? You may say, I'm going to wait until I've got my two doses in my two weeks and I'm fully vaccinated and I'm all set to go, right? So you may still have workers who are not yet totally willing to come back to work. Those are short-term issues, right? Sort of by definition, people are hopefully going to go and

get themselves vaccinated. Schools and child care centers are going to reopen fully. And so we just need to sort of get some time for all of this to sort itself through, and we'll be kind of back to normal. Got it. So let's talk now about the people who believe in your third theory in our automotive metaphor here, that we need to ease off on the gas and stop driving like a crazy person. What do the people who believe that say is the explanation for this worker shortage? So the big thing that they point to is unemployment benefits. During the pandemic, we have expanded unemployment benefits in all sorts of different ways. We've made them available to people who don't usually get them, we've allowed them to

last longer, and we've made them more generous. Right now, somebody who's getting unemployment benefits is getting $300 a week from the federal government on top of whatever they get from their normal state benefits. And so the claim that you'll hear from many businesses and from some economists is that we can't get workers right now because unemployment benefits are disincentivizing them from working. But it's more profitable for them to stay home and collect unemployment benefits than it would be for them to take a job. Yeah, look, there are sort of harder and softer versions of this argument, right? The sort of hard version is it is literally more profitable for some people to stay home. They are sitting on the couch playing video games and getting unemployment benefits

instead of working. The sort of softer version of this is, look, it may not be that a lot of people are just flat out saying they're not going to work, but this makes it easier for them to be pickier about jobs, to hold out for better pay, to wait a little bit longer. And so there are a lot of people who might theoretically be willing to work, but they're not rushing back to work right now because these benefits make it easier. So from where you sit, it's kind of hard to tell which of these scenarios is actually playing out in something like the latest jobs report. Yeah, so we're seeing evidence kind of pushing in both directions here, and it's really difficult with just one month of data to tell which of these theories to believe. And adding to that is that these different forces are not mutually exclusive. You know, you could imagine one person who has a kid at home and some child care challenges,

who's got concerns about the health of going back to work in the middle of a pandemic and who is getting these unemployment benefits that make it a little bit easier for them to wait it out until those other things improve. And I don't know that you could look at that person and say, well, the reason that they're not working right now is unemployment benefits or the reason is child care. It's all of these things working together. Right. That makes sense to me.

People's lives are complex. These factors might be simultaneously happening in ways that are hard to just see in one jobs report. But I wonder, is there other data, are there other reports, other indicators that might help point us to which of these scenarios is most true right now? Yeah. So in fact, there was another report that came out less than a week after that big jobs report that we were all looking at for evidence. And this was the report on inflation. And it was

another huge surprise. We'll be right back. So, Ben, I'm picturing you again at your computer looking for a new report, furiously refreshing the page. But this time, you're waiting for inflation numbers, not jobs numbers. So what were your expectations for these numbers, and then what actually happened? Yeah, so this report was the Consumer Price Index, which we're way into econ nerddom when

we start getting excited about the CPI report. Yeah, I was going to say, Ben, this is a family show. Please keep it PG-13. So this is basically the government's effort to estimate what is happening with the prices that consumers pay. So it's prices on everything from, you know, beef and bread to cars and air travel and everything that we spend. How much did prices rise in a given month? And everyone thought that this report would show that prices rose in April and actually rose a pretty good amount. Because again, we're in this reopening moment. Forecasters thought it would show an increase of about two-tenths of a percentage point from March to April, which sounds very, very small. But of course, it's just one month. So

it's actually would be pretty meaningful. But that's not what we saw at all. We saw much faster gains. We saw eight tenths of a percentage point. Again, sounds small, but four times what economists were expecting to see. Wow. And like, give me an example of how these price increases are actually showing up in the economy. So a lot of it is exactly what we would expect. Airfares were up, hotels were up, rental cars were up. This is all the stuff that we weren't doing and now we're doing it, and so those prices are rising quickly. They're rising even faster than we expected, but we're not surprised that they're rising. There are others that might be a little bit less intuitive.

Used car prices were up 10% from March to April, a 10% increase in used car prices in one month. That's pretty wild. Wow, that's nuts. So 10% in one month. And like, I haven't bought a car recently. But to put that in real terms, like people who were shopping for a car earlier this year, maybe their budget was, you know, $10,000. But if they waited a month, if they bought it in April, that $10,000 car they wanted is now $11,000. That's right. That's a pretty big penalty for waiting a month. And why?

Like, why did prices of used cars go up so much so quickly? So I think that's actually a great example of sort of how the economy is complicated right now. So one of the reasons for this is that a lot of the used cars that you buy are actually former rental cars. Rental car companies buy a ton of cars. They use them for, you know, a year, and then they sell them off to used car lots. Well, rental car companies a year ago, when everything shut down, they were not buying cars. In fact, they were selling off a lot of cars. And so now, fast forward a year later, they don't have any cars to sell. And so we've got fewer rental cars turning into used cars. That's happening at the exact same

moment that a lot of people are going back to work, but maybe they don't want to get on the subway yet or the bus quite yet, so they're buying up a used car. And so we've got demand rising at a moment when supply is for some sort of weird technical reasons, a little bit limited. And so all of a sudden prices spike. So I get the used car case and why the fact that rental car companies weren't buying cars last year means that there are fewer used cars on the market today, which makes the prices go higher. But this isn't just happening with cars, right? It's happening with the price of lumber,

with the price of chicken parts. The taco place that I get takeout from all the time just raised its menu prices. So are all of these just kind of individual stories with their own nuances and particulars, or is this all part of one bigger story? So it's a great question, and this is again where we run into this problem of it being hard to tell apart these different theories of what's happening. So the conventional theory right now, and this is the one that is held to by the Fed

and by most economists that I talk to, is that pretty much all of this are these weird short-term things that are happening in the economy. The word that the Fed keeps using is transitory. The word that the Fed keeps using is transitory. And actually, if you look at a lot of the categories that are not heavily affected by these sorts of issues, you don't really see rapid inflation. Rents, for example, have really been quite tame. We haven't seen a ton of inflation in health care and some of these other categories that are sort of outside of our immediate sort of pandemic weirdness. And so most economists look at that and they say, we've got to wait for kind of all this to pass by, and then inflation is going to settle back down

and it's not going to be that big a deal. But the fear with inflation is that it can become a self-fulfilling prophecy. What do you mean? So if prices go up a little bit one week or one month, you probably just kind of shrug your shoulders. This is life. But there's a certain point at which if every time you go to the grocery store, prices are higher. If every time you go out and grocery store, prices are higher. If every time you go out and spend money, prices are higher. You're going to go to your boss and you're going to say, come on, you got to give me more money here because you've seen what's going on with prices. I can't afford to buy anything anymore. And then the boss has got to go and raise prices

so that he can pay for your increased salary. And we get this cycle. Or think about it with the products that go into whatever it is you're making. If you're a McDonald's and beef prices are rising and potato prices are rising, now you've got to go and raise prices. And this starts to flow its way through the economy to the point that people now expect inflation to be higher. Instead of thinking that they live in a world

where prices rise a percent or 2% or 3% a year, now they start expecting prices to rise four and five and 6% a year. And they demand the raises and prices rise in accordance with that expectation. And all of a sudden we live in a world where that's just the reality, where prices rise 5% a year. And so if people do start acting as if they think inflation is coming,

what specifically would you be worried about happening? So I think this is where there are two concerns. One is that that really does become a self-fulfilling prophecy. And inflation starts rising. It becomes faster than we've been comfortable with in recent years. And that's, look, that's bad news for a lot of people. That's bad news for anybody who's sitting on savings in a savings account, where the value of that gets slower. It's bad news for anybody on a fixed income who is not seeing their income rise along with inflation

and therefore is seeing their income and its actual buying power decline. It's bad news for businesses that are trying to navigate a world in which their input prices are rising really rapidly. So that's one concern. The other concern is that the Federal Reserve looks at that possibility, becomes concerned about it, and says, we better get control of this

before it gets out of control. And so they raise interest rates to try to slow down the economy, and we end up needing to weaken the economy intentionally in order to prevent that run-up in prices. Got it. That the government, the Federal Reserve, could essentially start a recession on purpose in order to deal with the threat of inflation. Look, this is what happened in the 1970s and early 1980s. We saw in the 60s and 70s, for a variety of reasons, inflation really pick up. And the only way that we got under control

was that the Fed stepped in and hiked interest rates so high that it crushed the housing market, it eventually crushed the job market, and created a really punishing, brutal recession. They succeeded. They got control of inflation, but at a tremendous cost to a huge number of Americans. So the next time we get jobs numbers or inflation numbers in the coming months,

will this debate be settled? Will we know if this was, in fact, a transitory thing or if this was some signal of a more permanent problem? We will eventually. We won't necessarily right away. You know, look, on a certain level, if we continue to see these trends play out, right, that's going to add to these concerns. If it starts to reverse, then that's going to ease some of those concerns. But this highway merge is not expected to take just one month or just two months. It's expected to take a little bit of time

as we get vaccines out there, as we reopen schools, as we work through all of these constraints in the economy right now. And the fact that these problems continued for another month doesn't tell us that those problems are going to persist for an extended period of time. It just tells us that we're not past that period yet. And so on some level, it's really probably not going to be until the fall that we have a clear signal of whether this was a transitory period or something more concerning and more lasting. I mean, this seems to be happening very quickly. Like, if you are the Federal Reserve or the government, you're trying to figure out, you know, do we extend unemployment benefits?

Do we raise interest rates? Whatever you might do as a government to sort of control the possibility of inflation, like, that seems like a decision they have to make pretty quickly. They might not actually want to wait until the fall. Yeah, I mean, this is all playing out at a moment when a lot of these decisions are being made. Now, the Federal Reserve has made quite clear that they are not going to change their policy

because of a couple months of data. And I think there's very little reason to doubt them at this point. On the political side, this is a very real discussion happening right now. We have several states that have actually said, forget it. We are cutting off these extra unemployment benefits because we think it's holding back the economy. And then you have other states, mostly run by Democrats, that are saying, no, we're going to keep on this path. other states, mostly run by Democrats, that are saying, no, we're going to keep on this path. And look, for economists, that has an advantage to it, which is that as states go in different directions, we're going to kind of get to test these theories. If Montana cuts off unemployment benefits and we see a big surge in people going to work in Montana, that gives us a pretty good indication of what was going on there.

If instead people don't have money to spend there anymore and we see a fallback in activity, that gives us a sense that no, the real problem here was the economy was not ready for that support to get pulled out from under it. So we're going to get some answers to this, but somebody's right and somebody's wrong, and there's going to be costs for the people in the states that get it wrong. Ben, thank you so much.

Thanks for having me. We'll be right back. Here's what else you need to know today. On Monday, the battle between Israel and Hamas entered its second week. The death toll in Gaza surpassed 200, more than 50 of them children. And the possibility of a ceasefire remained distant. Despite efforts by multiple countries, including the U.S., to reach a diplomatic end to the violence, both Israel and Hamas launched new rounds of attacks on Monday. And... Just as in World War II, America was the arsenal of democracy in the battle against COVID-19 pandemic,

our nation is going to be the arsenal of vaccines for the rest of the world. President Biden has announced a plan to deliver 20 million doses of the three COVID-19 vaccines already authorized for use in the U.S. to foreign countries struggling with the pandemic. U.S. to foreign countries struggling with the pandemic. In a speech, Biden said that the United States would never be truly protected from the virus until the rest of the world was also vaccinated. No ocean's wide enough, no wall's high enough to keep us safe. The 20 million vaccine doses from Pfizer, Moderna, and Johnson & Johnson will be in addition to the 60 million doses that the U.S. has pledged to send overseas from AstraZeneca, which are not yet authorized for use in the U.S.

It's the right thing to do. It's the smart thing to do. It's the strong thing to do. Today's episode was produced by Eric Krupke, Luke Vander Ploeg, and Annie Brown, with help from Rachel Quester and Rob Zipko. It was edited by Dave Shaw and engineered by Chris Wood. That's it for The Daily.

I'm Michael Barbaro. See you tomorrow.