Labor Supply

Immigration is what's keeping the recovery going so strong for so long

Photo from iStock

I hope you had a happy Labor Day. In deference to the vacation spirit, I will (try to) keep this note short. Besides, I am using this holiday to move my family to a new location: from the DC exurbs in Virginia to the mountains of West Virginia. I will be busy. Wish me luck.

Meanwhile, now that we’ve had a day off, let’s spend some time really thinking about labor.

Labor—and the seemingly inexhaustible supply of it—appears to be the common theme in all macro commentary over these last several months. In Q1 and Q2 of 2022, the U.S. economy underwent two massive shocks. The monetary shock was Fed chairman Jerome Powell’s boosting of the Fed Funds interest rate, its steepest vertical ascent since the chairmanship of Paul Volcker 43 years ago. The fiscal shock was the lapsing of the U.S. Treasury’s various pandemic stimulus programs, causing the federal deficit to shrink by 12 percentage points of GDP in a mere three quarters. You’d have to go back even earlier, to 1946 (the demobilization following World War II), to find a precedent for this hit.

Either shock alone, economists thought, should be more than enough to push the economy into recession. The two together? It was a dead cinch.

As if to oblige the economists, most of the long-term recession indicators began blinking red later in 2022: the yield curve inverted badly; M2 and credit plunged YoY; consumer expectations and small business optimism sunk. Early this year, many of the medium-term indicators have also gone critical, especially in the manufacturing, housing, and construction sectors.

Nevertheless, as we’ve all seen, the economy keeps chugging ahead—economists be damned. And the explanation seems to be an endless supply of employment. Every month, it seems, more workers get hired, those workers spend, firms make money, and the next month those firms hire yet more workers. Who knows where it may end? For Q3, the Atlanta Fed is forecasting a blistering annualized GDP growth rate of nearly 6%. Absent some productivity miracle, that means (you guessed it) yet more workers are coming on stream.

While I don’t think we can say that the recession indicators have been proven wrong, it is fair to say that they haven’t worked as rapidly as most economists last year thought they would. And that’s because we’ve been able to hire so many people. In 2021, U.S. employment grew by an astonishing +6.21M. Then in 2022, it grew by another +3.16M. And then in 2023, by another +2.24M.

Which should prompt us to ask a rather simple question: Where are all these new workers coming from?