Two things are certain about the American economy, and a third is somewhat certain. Inflation sits near a four-decade high, although it has improved slightly in the past quarter. The Federal Reserve continues raising rates at breakneck speed to combat this inflation. The rate increase likely will take the American economy into recession, and the jobless rate will move from well below 4% currently to the 5% to 7% range over the next year. That range of unemployment increases means millions of people will be out of work soon as the most certain path to an inflation rate that has been normal over the past decade.
To measure the magnitude of job loss, the calculation starts with the size of the U.S. civilian labor force as defined by the Bureau of Labor Statistics. The number is about 160 million people. A 1% rise in unemployment is equivalent to about 1.5 million people. The economy has added about 250,000 jobs a month over the past year.
Prominent economist Harvard’s Larry Summers says the jobless rate needs to be 6% over five years or 10% for one year to get inflation back to the Fed’s 2% target. The 10% was the worst monthly number during the Great Recession. Even at the lower range of this forecast, close to 4 million people will lose jobs. The 10% jobless rate increases the number to an unimaginable 7 million.
The Bank of America believes unemployment will only need to rise to 5.5% to undermine current inflation. A survey of economists by The Wall Street Journal forecast a jobless rate of 4.7% from early 2023 to 2024. At this muted number, 2 to 3 million people could lose jobs.
Any guess about job loss depends on how long high inflation will last and how high it is. The consumer price index dropped to 7.1% year over year in November. That was down from well over 8% in the months before that. Among the reasons is that the supply chain, which had been tight for months, began to loosen, getting goods to consumers at a pace that met demand. However, there remains a shortage of certain items, including food. These increases remain in double-digit percentages in many cases. Food, energy, transportation and housing are necessary pieces of consumer spending.
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No matter how educated, the guessing game forecasts millions of job losses well into next year. It is even harder to forecast when inflation will drop, the Fed will become less aggressive and a new round of job additions across the economy will begin.
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