A Quick Review of U.S. (December 2021) Employment Report and the Main Reason U.S. Real GDP Growth Will Slow In 2022?

Generating faster economic growth requires the presence of spare capacity. In contrast, tight labor markets signal firms will face challenges compared to when the U.S. Unemployment Rate stood at 14.8% April 2020).

With a current Unemployment Rate of 3.9% in December 2021, we are hovering near the 3.5% rate observed before the start of the Covid-19 pandemic ( March 2020).

Summary of U.S. Employment Conditions

In 2021, the U.S. economy enjoyed a robust gain of +6.4 million in non-Farm payrolls (Establishment Survey and +6.1 million in Employment (Household Survey). These figures stand in stark contrast to the 22.4 million jobs (Establishment Survey), and 25.4 million jobs (Household Survey) lost during the severe 2020 Recession. At present, both U.S. Employment Surveys are still missing 3.6 million Non-Farm Payrolls and 2.9 million Employment positions, respectively. And for those worried that the Household Survey Employment came in hot in December (+651k) versus the Establishment Survey (+199k), the annual gains ended the year close to each other.

One of the highlights of the U.S. (December 2021) Employment report revealed the national Unemployment Rate plunged to 3.9% in December 2021, (down from 4.2% in November), and down from its peak 14.7% peak reading in April 2020. In contrast, the Black and Hispanic Unemployment rates remained higher than the general rate. At the peak of the pandemic, the Unemployment Rates topped 16.8% and 18.8% for both groups, respectively. In December 2021, those Unemployment rates stood at 7.1% (up from 6.5% in November), and 4.9%, (down from 5.2% in November), respectively. The spread between the Black Unemployment Rate and the national rate has widened while narrowing for the Hispanic Unemployment Rate.

On a less positive note, the U.S. Labor Force Participation Rate (which measures the number of individuals working or looking for work as a percentage of the U.S. civilian population, excluding incarcerated individuals) stood unchanged from the prior month at 61.9% in December 2021 compared to a 63.4% level before the start of the global pandemic.

This reflects a jump in the number of individuals that have retired early (as outlined in studies conducted by the Federal Reserve Bank of Dallas and the Federal Reserve Bank of St. Louis). Others have dropped out of the labor force to stay home to take care of family members impacted by the virus and those reluctant to work due to fears of contracting the virus.

2021 Was a Powerhouse Year for U.S. Economic Growth

As the year began, there was hope in the air that the introduction of multiple medical options to manage the virus would mitigate the economic effects of the pandemic. For this reason, we observed U.S. Real GDP growth rates of 6.3% and 6.7% observed during Q1, and Q2:2021, respectively. However, a surge in the virus during Q3:2021 led to a slowdown in economic activity to 2.3% growth. Of course, some analysts also attributed the slowdown in Q3:2021 to the availability of enhanced unemployment insurance benefits which ended in early September 2021.

Using our Q4, Real GDP estimate, the economy should grow by 4.0% (twice its 1.8% potential growth rate) in 2021. In the fourth quarter, progress against the Delta variant boosted growth, while the debut of the Omicron variant hurt growth.

What is the Main Reason Economic Growth Will Slow in 2022?

Now all eyes are on 2022 as Economists and financial market investors are projecting U.S. Real GDP growth will slow sharply to around 2.4%. Others blame the start of Fed tapering of Treasury and Mortgage-Backed security purchases, reduced government spending (aka, fiscal drag), and projected increases in the federal funds rate as catalysts for slower economic growth in 2022.

While these factors will surely slow U.S. Real GDP growth, they exclude the most important factor responsible for slower U.S. economic growth in 2022. U.S. growth will slow this year because we are running out of economic slack needed to fuel faster growth.

One can look no further than at the number of firms delaying Auto deliveries to customers or the number of Homebuilders unable to deliver purchased homes on schedule as reasons for slower growth. Some builders are even turning down business because of an inability to secure labor and materials needed to manufacture these units within a reasonable period. And, while supply bottlenecks may ease in 2022, most firms do not have an ample supply of potential workers that they could hire to boost production to meet existing demand. Although productivity growth generated from increased technology spending could offset some of the effects of labor shortages, it will take time for these improvements to come to fruition.

As for now, the U.S. economic growth will continue to grow above our potential growth rate, but the spread between actual and potential growth is likely to continue narrowing because we are running out of excess productive capacity. This is the main reason economic growth will moderate in 2022!