Five things we learned about the economy this week

The Labor Department delivered another crackerjack jobs report on Friday, flashing another signal of an economy that has powered through fears of a recession.

The national unemployment rate dropped April to 3.4 percent as the U.S. economy added 253,000 jobs, according to the Labor Department, far exceeding economists' expectations.

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Labor force participation also stayed steady as the Black unemployment rate hit a record low and the number of prime-age workers in the economy reached the highest level since before the 2007-08 recession and financial crisis.

The strength of the U.S. job market in the aftermath of the coronavirus pandemic and rapid Federal Reserve rate hikes is confounding economists and may reflect deeper structural changes.

"Both payroll and household employment are well above [the Congressional Budget Office’s] pre-pandemic forecast, which is especially amazing given that the population is smaller than they expected due to premature deaths and missing immigrants," wrote Jason Furman, who chaired the White House Council of Economic Advisors (CEA) under former President Obama, online Friday.

Even so, tumult in the banking sector could push the economy closer to a much-feared downturn.

Here are five things we learned about the U.S. economy this week.

Inflation is falling fast even as the job market is staying hot

Inflation has been coming down since the middle of last year with the consumer price index (CPI), falling from 9.1 percent annually last June to 5 percent in March.

While that’s still above the Fed’s target rate of 2 percent, prices have been falling without an accompanying rise in unemployment, which has thrown many economists for a loop.

Wages are also slightly higher than are consistent with 2 percent inflation, according to Friday’s employment report, but not by much.

“Over the last three months, average hourly earnings have risen at a 4.2 percent annual rate. This is only a few tenths of a percentage point higher than peaks reached in 2019 when the inflation rate was at 2.0 percent,” economist Dean Baker of the Center for Economic Policy and Research, a left-leaning research nonprofit, told The Hill.

Most economists agree that inflation is largely being driven now by companies keeping prices higher simply because they can.

Powell expressed confidence Wednesday that the end of supply chain disruptions, which drove much of earlier inflation spike, would also help bring prices down.

“As goods pipelines have gotten back to normal so that we don’t have long waits and shortages and that kind of thing, I think you will see inflation come down and you’ll see corporate margins coming down,” Powell said Wednesday.

Low-earners are pulling in better wages relative to inflation

Workers on the lower end of the earning spectrum, who tend to work in service industries, are still seeing their pay increase more than workers in other parts of the spectrum.

While inflation has outpaced wage growth in the recovery from the pandemic for American workers overall, the situation has been reversed for low-earners, who have seen their real wages increase in a phenomenon known as “compression.”

“Wage growth continues to be somewhat faster for lower paid workers. Average hourly earnings overall rose at a 4.7 percent annual rate since January for production and non-supervisory workers both overall and in leisure and hospitality,” Baker wrote online Friday.

Unemployment for Black Americans hit a new low in April at 4.7 percent, after breaking a record in March, though unfair treatment of Black Americans in the workforce remains a serious problem.

Good news for workers may be bad news for the Fed

The Fed issued its tenth interest rate hike since last March on Wednesday, bringing its baseline interest range up to 5 to 5.25 percent.

The Fed in March expected to end the year with interest rates around that level, but more resilience in the labor market could push central bank officials to keep hiking.

Friday’s strong employment levels could be reason for the Fed to execute more rate hikes and further slow the U.S. economy in response to inflation.

The Fed’s March economic forecast put the unemployment rate this year at 4.5 percent, more than a full percentage point higher than where unemployment stood on Friday. More than 1.8 million jobs would be lost throughout the economy if the jobless rate hits the Fed's expected level.

“The case of avoiding a recession is, in my view, more likely than that of having a recession,” Powell said on Wednesday of his own personal views on the economic outlook, even as Fed staffers predict a recession.

“But I don’t rule that out, either. It’s possible that we will have what I hope will be a mild recession.”

Bank failures and bailouts make a recession more likely

While the overall economy is holding steady, a spate of bank failures and bailouts that started in March and extended into May could make a recession more likely.

The U.S. economy grew at an annual pace of 1.1 percent during first quarter, according to Commerce Department data, a notable slowdown from 2022. Experts fear the economy could slow further as banks hold back on lending and tighten their belts.

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Stricter lending standards have much the same effect on the economy as higher interest rates, both of which slow the pace of business activity.

The American Bankers Association’s (ABA) credit index fell in April to its lowest point since the onset of the pandemic. 

“The reading indicates broad-based expectations for weaker credit market conditions over the next six months among bank economists, and banks are likely to grow more cautious about extending credit,” the ABA said in an April release.

Bankers with the ABA said they expect credit conditions for both consumers and businesses to weaken over the next six months as concerns about the regional banks continued.

Despite lingering concerns, regional bank stocks were up sharply during trading on Friday. PacWest Bank was up 70 percent, and Western Alliance and Zions Bancorps both posted double digit percentage gains. The S&P regional banking index was still down more than 10 percent on the week at midday on Friday.

The White House indicated Thursday it was monitoring the short-selling activities related to the regional bank sector. Wall Street short sellers bet against stocks rather than in favor of them.

The ways and places Americans work are changing

The robust U.S. job market in the aftermath of the pandemic has been marked by high levels of employment and low wage growth. There has been ample churn in the job market, allowing many workers leave old jobs to take new ones.

“As was the case in recent months, job growth remains concentrated in just a few sectors, particularly health care and hospitality. Although we have seen several public layoff announcements, the job growth in these few sectors continues to offset losses in technology and other industries, including the mortgage market,” economist Mike Fratantoni of the Mortgage Bankers Association wrote in an analysis.

This is reflected in Friday’s diffusion index — a measure of how many industries are adding jobs —which showed that jobs are being added in targeted areas like warehousing and hospitality rather than across the economy as a whole.

“The employment diffusion index... stood at 57 percent in April near its lowest post-pandemic level. It remains well below its average of 69 percent in 2022, indicating that job growth has become significantly less broad-based,” EY-Parthenon economist Lydia Boussour wrote in analysis on Friday.

While American workers adopt new behaviors related to short-term contractual and remote work, these changes are being sped along by other forces in the economy. Commercial real estate are now squarely in the crosshairs private equity and other large investors who keen to scrap obsolete office space for parts as white-collar workers work more from home.