NTEA Senior Director of Market Data & Research
This article was published in the August 2022 edition of NTEA News.
As a whole, the U.S. economy has not returned to pre-pandemic normal; however, some segments have, such as the labor market. Figure 1 shows the gap between initial and continuing unemployment insurance claims narrowed to its normal range as of the first week of June. In addition, the levels of both initial and continuing claims are once again near pre-pandemic historical averages. This is aligned with the response to NTEA’s Business Conditions Survey, in which respondents noted two of their most difficult challenges right now are hiring new employees and retaining existing employees.
Figure 1 also serves as a reminder that the U.S. labor market had little to no slack long before COVID-19 was classified as a pandemic. In fact, the 2022 monthly unemployment rates from January to June are almost identical to those registered in first-half 2019. The lowest rate registered in 2019 was 3.5%. The rate will probably fall to that level in third-quarter 2022.
The one substantial difference between the current labor market environment and 2019 is that inflation was near historical average in 2019 and trending down. Its impact on the labor market was marginal. As of 2022, inflation is significantly affecting wages, and has reached a level that hasn’t been seen since the early 1980s.
There is an increasing level of media speculation that the U.S. has already entered the initial phase of a recession. The most current economic data does not support that premise, but there are some warning signs and indications that will need to be closely monitored going forward. The current unemployment rate of 3.6% is one historical indicator that the U.S. has not currently entered a recessionary period.
Figure 2 sheds some light on the idea that high inflation is likely to lead to recession. This occurred in the 1970s because inflation persisted, and the Federal Reserve didn’t raise rates fast enough. Inflation and unemployment rose and fell with the economic cycle through the 1970s, but both trended up the entire decade, which led to the coining of the word stagflation. Rates finally rose high enough — and fast enough — to trigger the deep recession of 1982–1983, which caused inflation to stabilize at an acceptable level.
The black line in Figure 2 marks a break in history. To the left of it is 1969 through 1984. To the right is 2005 to current time. Unlike the 1970s, after the 2007–2009 recession, inflation and unemployment trended down together as the Fed kept the federal funds (overnight loans) rate near zero for about seven years. The historic relationship between falling unemployment and rising prices was once again disrupted.
Then the pandemic happened. It caused a short but extremely deep recession and a structural change in demand for products and services in numerous industries. This was followed by a steep climb out of recession, but it takes time for markets to rebalance, and an uneven response to the pandemic led to supply chain disruptions in many industries. In the background, baby boomers around the world continued retiring; the largest mass exit of experience from the workforce in human history. The market rebalancing, which occurred in response to all of the above, will eventually stabilize — but it will take time. In the short-run, though, it has normalized the relationship between unemployment and inflation. Unemployment is low, and inflation has risen substantially.
The Fed has already responded with interest rate hikes, and is expected to raise rates again at the end of July. Because of the continued acceleration of inflation in June (to 9.1% on a same-month, previous-year basis), the Fed will likely raise rates more than expected despite the fact that some downside risks to economic growth have increased. Ongoing improvements in supply chains are the counterpoint in terms of upside risk.
For planning purposes, work truck and truck equipment companies need to be aware rates will likely continue increasing through 2023. Rates will probably rise as long as inflation remains high, even if downside risks ultimately outweigh upside risks, and lead to recession. Higher rates will have a negative impact on truck demand (more so for the heavy end of the weight class range). In addition, after consumer price inflation is pulled down to an acceptable level, upward pressure on wages will likely remain an issue, since baby boomer retirement is essentially independent of the economic forces currently impacting the labor market and consumer prices.
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