The labor market is the strongest it’s been since the pandemic started – and setting up a huge boost to America’s most crucial economic engine

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  • Tumbling jobless claims signal the labor-market rebound is entering full swing as the US reopens.
  • Improved hiring can boost consumer spending, which accounts for 70% of economic activity.
  • Stimulus boosted retail sales higher in March, and a stronger labor market can lift spending further.
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For several months during the pandemic, the labor market lagged other gauges of economic health.

As manufacturers rebounded and Americans spent their stimulus checks, hiring remained stagnant, falling short of a V-shaped recovery as COVID-19 cases surged during the winter.

This was seen in payroll growth – perhaps the most closely watched monthly indicator – which slowed in the fall and even turned negative in December amid increased restrictions. And new filings for unemployment, while down from their early 2020 highs, stayed elevated.

But then came March, and the literal green shoots of spring were accompanied by the figurative indicators of economic recovery.

US payroll growth saw its biggest jump since August, while the unemployment rate declined to a fresh pandemic-era low. The progress has prompted Wall Street titans to adjust their forecasts higher to reflect several months of robust job gains.

Data published Thursday added to the encouraging outlook as jobless claims fell to a pandemic-era low. And with more Americans returning to steady employment, spending – a key driver of economic growth – stands to swing higher.

“The economy, at this point, does seem to be at a bit of an inflection point,” Federal Reserve Chair Jerome Powell said Wednesday, adding that the March jobs report shows what faster growth can look like.

Where hiring accelerates, so does spending

A rapidly healing labor market can be exactly what shifts the recovery into a higher gear. Employment, and the steady income that comes with it, leads Americans to spend more. That spending leads businesses to hire more as they look to service stronger consumer demand.

Consumer spending accounts for roughly 70% of economic activity, and the nature of the coronavirus recession made sales data even more relevant to tracking the recovery. Lockdown measures kept Americans from spending at physical retailers, and the record-high unemployment rate seen at the start of the crisis also cut down on activity.

The government filled in some of the hole with its unprecedented stimulus packages. Retail sales – a popular proxy for overall spending – soared 7.6% in January as people deployed $600 direct payments included in President Donald Trump’s stimulus bill.

That dynamic repeated itself last month. Retail sales surged 9.8% in March to the highest level on record, the Census Bureau said Thursday. The increase is widely attributed to Democrats’ $1.9 trillion stimulus measure, as well as faster vaccination, warmer weather, and relaxed business restrictions.

“The payments were two-and-a-half times bigger than in January, so the consensus forecasts always looked timid,” Ian Shepherdson, chief economist at Pantheon Macroeconomics said, adding sales should rise again in April before trailing as Americans shift spending to non-retail outlets.

Higher employment can also replace stimulus as a steadier boost for spending. While stimulus does swiftly drive spending higher, most of the direct payments go toward saving and paying down debts, according to Federal Reserve research. Last month’s sales data also suggests the stimulus bump fades quickly. After spending jumped in January, it declined 2.7% the following month. Employment, on the other hand, provides the means for more stable consumption.

Economists already incorporated the stronger spending and jobless claims data into their outlooks. JPMorgan’s forecast for March GDP leaped to 1.6% from 0.7% growth, according to its nowcaster model. The firm’s first-quarter growth estimate rose to 4.5% from 3.5%.

The cost of an upward spiral? Inflation

But with stronger consumer demand comes inflation. Price growth has become the indicator to watch as the country edges toward a full recovery. Those opposed to Biden’s spending plans have warned of rampant inflation fueling a new economic downturn. Others view the administration’s stimulus as necessary to avoiding the plodding recovery seen after the Great Recession.

Indicators signal stronger inflation is at the country’s doorstep. The Consumer Price Index – a commonly used gauge of price growth – gained more than expected last month amid the spending surge. To be sure, officials including Fed Chair Powell and Treasury Secretary Janet Yellen have said they expect stronger price growth to be temporary.

But years of elusive inflation dynamics suggest the central bank and the Biden administration have a looser grip on price growth than they’d like.

“Economists don’t fully understand why we’ve had low interest rates and low inflation in the last decade. And that’s problematic because we don’t know under what circumstances that will change,” Laura Veldkamp, professor of economics and finance at Columbia University, told Insider. “The risk is, this is a ton of spending that … will trigger a bunch of inflation. And those high interest rates will mean that this new debt we’re taking on is going to become incredibly expensive to service.”

Read the original article on Business Insider