Riding the Economic Bike: ADP Economist on Inflation and Labor Market Dynamics

Inflation Remains a Persistent Risk in the U.S. Economy, Says ADP Chief Economist

Recent economic data is raising concerns about inflation in the United States, with Nela Richardson, the chief economist at ADP, emphasizing that inflation is “always going to be a risk.” This concern arises due to significant structural changes in the U.S. labor market.

The latest ADP monthly report revealed that private payrolls increased by only 89,000 jobs in September, falling far short of the Dow Jones consensus estimate of 160,000. This disappointing figure follows an upwardly revised 180,000 jobs added in August. While job reports have traditionally been viewed as lagging indicators, Richardson noted that the relationship between the labor market and monetary policy has evolved during the current economic cycle.

For the past decade, the U.S. economy has relied on low-interest rates to drive growth, as policymakers aimed to counteract recessionary pressures without significant inflation. However, with inflation surging globally in the wake of the COVID-19 pandemic, the U.S. Federal Reserve embarked on a series of interest rate hikes, raising the Fed funds rate target range to a 22-year high of 5.25-5.5% in July 2023.

Nela Richardson explained that the U.S. economic growth of the last decade was underpinned by near-zero interest rates. However, demographic trends, such as the aging U.S. population, are resulting in persistent labor shortages, making inflation an ongoing risk. She stated that returning to near-zero interest rates to support the economy would be challenging in this new economic landscape.

Richardson also pointed out that the U.S. economy has transitioned from training wheels to riding a regular bike, indicating that the era of extraordinary economic support measures has come to an end. Despite concerns of a recession following the Fed’s tightening of monetary policy, the U.S. economy has remained resilient.

The Federal Open Market Committee paused its rate-hiking cycle in September, and economic growth projections were significantly increased, with GDP growth forecasted at 2.1% for the year. Inflation is gradually moving closer to the Fed’s 2% target, and labor market tightness, a potential driver of inflation, has begun to ease. Nonetheless, unemployment remains relatively low compared to historical standards.

The evolving relationship between the labor market and monetary policy means that economic dynamics are more complex than ever before. Fed policy not only affects the labor market but is also influenced by it. This interdependence means that traditional models of lagging indicators may no longer apply, making it crucial to closely monitor both economic data and policy decisions to gauge the health of the U.S. economy.