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The latest U.S. real gross domestic product (GDP) increased 2.5% in 2023, 1 exceeding the expectations of many economists. Initial projections from the December 2022 Federal Open Market Committee (FOMC) meeting placed the figure at a modest 0.5%.2 The resilience of the U.S. economy amidst a challenging monetary tightening cycle is impressive, with several contributing factors becoming apparent.
Remarkable labor force growth emerges as a significant driver of economic resilience. Data from the U.S. Bureau of Labor Statistics (BLS) shows that in 2023, the total labor force expanded by approximately 2.5 million, as demonstrated in today’s chart.3 This marks a notable increase compared to the average of approximately 1.7 million labor force growth annually from 2015 to 2019, driven by both population growth and a rising labor force participation rate.
Furthermore, the recent increase in the labor force and labor force participation rate have played a role in quelling inflation. The year-over-year increase in the consumer price index (CPI) has decreased from the June 2022 peak of 9.1% to 3.2% in February 2024.4 This disinflation process is noteworthy for not causing significant demand destruction, suggesting that rapid supply adjustments are driving the trend. As I analyzed in a previous Chart of the Week post, a robust labor force is crucial for sustainable growth without inflationary pressures.
Key Takeaway
Looking ahead, the sustainability of the recent strong labor force growth and its long-term impact on financial markets raises questions. The current increase appears to reflect a normalization following disruptions during the COVID-19 pandemic. From a financial markets perspective, strong labor force growth signals high economic output capacity, potentially leading to higher equilibrium interest rates, assuming all other factors remain constant. This partly explains the economy's ability to withstand high policy rates lately and introduces uncertainties into the path of monetary policy.
Sources:
1Bureau of Economic Analysis – Gross Domestic Product, Fourth Quarter and Year 2023 (Advance Estimate); 1/25/24
2Board of Governors of the Federal Reserve System – Summary of Economic Projections; 12/14/22
3Bloomberg
4U.S. Bureau of Labor Statistics – Consumer Price Index Summary; 07/13/23 and 3/12/24
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