Axios Macro

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πŸ‘€ πŸ’Ό A new data point for labor-market watchers out there: June job openings saw the largest one-month decline since the onset of the pandemic, dropping to 10.7 million vacancies from 11.3 million. Still, quits remain high, and layoffs remain near record lows.

  • Today's edition looks at the Inflation Reduction Act and the issue with forecasts about whether the bill does what its name suggests. Plus, why Goldman Sachs is pessimistic about one aspect of the labor market recovery.

Today's newsletter, edited by Javier E. David, is 700 words, a 3-minute read.

1 big thing: The problem with Inflation Reduction Act forecasts

Sen. Joe Manchin addresses the media
Sen. Joe Manchin speaks to reporters about the Inflation Reduction Act he negotiated. Photo: Anna Moneymaker/Getty Images.

How much would the Inflation Reduction Act actually reduce inflation? In the calculations starting to emerge from economic modelers, the answer is "a little, maybe."

  • But these underscore the limitations of looking at laws aimed at fixing microeconomic problems, through a macro lens.

Driving the news: Last week, Sen. Joe Manchin agreed to support legislation aimed at addressing global warming, reducing prescription drug costs, and cutting the deficit. Early estimates of how much it would reduce inflation, however, suggest a minimal impact.

  • Moody's Analytics estimates it will only reduce consumer prices by 0.33 percent over the coming decade. That's a total, not an annual number, meaning it would bring down the inflation rate only by three-hundredths of a percent per year.
  • The Penn-Wharton Budget Model finds the law would "very slightly" increase inflation in the next two years before reducing it thereafter, though those estimates are "statistically indistinguishable from zero."

Yes, but: These types of models are really not built to say anything terribly useful about how Manchin's legislation would affect the economy.

  • They are built around high-level aggregates: how corporate tax increases would affect capital investment, for example, or how deficit reduction might lower interest rates.

By the numbers: The bill is small potatoes in the context of the overall U.S. economy.

  • By Moody's estimates, it would spend an extra $43 billion a year over the next decade, and increase tax revenue by $74 billion. GDP, however, is on track to average $30 trillion a year over the next decade.
  • With a law that spends less than 0.2% of GDP per year, it's just hard to move the dial, in either direction, on macroeconomic aggregates like growth and inflation.
  • By contrast, the American Rescue Plan spent about 5% of GDP last fiscal year, so there is a much more plausible argument that it contributed significantly to growth and inflation.

Between the lines: The Inflation Reduction Act's exact impact will be impossible to know with certainty, even with hindsight, as any impact will be dwarfed by all the other things changing in the economy every month.

  • Its most significant effects will be on microeconomic goals like speeding a transition to cleaner forms of energy, keeping down drug costs, and reducing the deficit through more aggressive tax enforcement.
  • Conversely, to opponents of the legislation, the open question will be whether it worsens problems, such as disincentivizing pharmaceutical companies to invest in new drugs.

What they're saying: "While assessing the magnitude is always hard, it’s pretty clear directionally that this bill will help the Fed to fight inflation," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, tells Axios.

  • "This bill is just a small piece of the puzzle, but it’s helpful to have fiscal policy and monetary policy finally rowing in the same direction," she said.

2. A downbeat jobs prediction

Data: Labor Department; Chart: Axios Visuals
Data: Labor Department; Chart: Axios Visuals

This may be as good as it gets for the labor force participation rate, or for the share of workers employed or looking for employment.

  • That's according to Goldman Sachs, which put out a note titled "The Labor Force Participation Recovery is Mostly Behind Us."

Catch up quick: Goldman says the majority of the drop-off is due to older workers exiting the labor force, a phenomenon unlikely to reverse in a meaningful way.

  • It also notes that low-income workers in the jobs market has not improved since pandemic stimulus ended, making it less likely that these workers will return at all.

By the numbers: Goldman does expect the strong job market will push up participation among prime-age workers, which in turn will increase the overall rate up to 62.3% by year-end. But that's about one percentage point below the pre-pandemic rate.

  • If Goldman is right, that will be the peak before the rate steadily drops to 61.8% by the end of 2025 β€” lower than the bank previously expected. The decline is in line with demographic trends and an aging workforce (the CBO put out new demographic forecasts last week).

The bottom line: The forecast throws cold water on the idea that America's labor shortage β€” which has pushed up wages β€” will be stemmed by an influx of workers returning to empty jobs. Rather, worker demand may need to come down.