The Sobering Lesson of a Good Jobs Report

Good news.

Photographer: Patrick T. Fallon/Bloomberg

The improvement in the U.S. labor market is certainly good news. It could soon become a headache, however, if it persists alongside disappointing economic growth.

The economy added 255,000 jobs in July, after adding 292,000 in June. Employment growth was weaker earlier in the year, and two solid months don’t make a trend -- but even so, the labor market is in pretty good shape. The unemployment rate stands at just 4.9 percent, yet the economy keeps drawing workers back into the labor force and creating new jobs.

QuickTake Monthly U.S. Jobs Report

The problem is that economic activity, according to the most recent indications, remains subdued. The implication is that growth in output per worker -- productivity -- is lagging. Underlining the point, the current recovery has so far relied on consumer spending much more than investment, which remains in the doldrums. Companies that don’t invest don’t get more productive.

High employment is great -- but without stronger growth in productivity, a tight labor market won’t raise living standards as much as it should.

A strong jobs market increases the likelihood that the Federal Reserve will resume its effort to normalize monetary policy later this year by raising interest rates. This would be wise, and not just because a tightening labor market will gradually put upward pressure on wages and inflation. More important, the Fed’s necessary but extraordinary monetary stimulus has created financial stresses and uncertainty about the future, both of which may be weighing on business confidence. Getting back to normal in monetary policy would help to lift that cloud.

The corollary to this is that fiscal policy has to do more. One area where this is vital is infrastructure spending. Lackluster public investment not only depresses productivity, it also adds to the costs of doing business. A shortfall of public investment hobbles private investment, too.

Behind the good news of the latest jobs numbers, then, is a sobering lesson: America’s future prosperity will depend less on the Fed and more on the ability of the next president to work with Congress and the states.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.