Will Inflation Kill the Job Pick-Up? Probably Not

From the beginning, this economic recovery has felt different. Officially, it began back in November, 2001. But it has only been in the past few months that growth has been strong enough for Corporate America to hang out the "For Hire" signs and take on more workers. And now, just as the job market has turned up, fears are mounting in financial markets that an inflationary brew of rising interest rates and surging oil prices will prematurely cut short the growth and the upswing in hiring.

It doesn't have to be that way. Indeed, such fears are probably misplaced. That's because the elongated start of the recovery means that the economy probably has a lot more room to run before it encounters a dangerous spurt in inflation. The key is productivity growth. It has been running at a remarkable 4.6% annual rate since the end of the recession and is the main reason the recovery has been so unusual.

To be sure, productivity growth is likely to slow somewhat as new hires adjust to their jobs. That process may have already begun in the first quarter, when productivity growth ebbed slightly to a 3.5% annual rate. But that's still well above the 1.5% pace that prevailed in the two decades before the mid-'90s boom. Indeed, productivity's recent performance has prompted experts to bump up their estimates of its long-term trend rate, to 2.5% to 3%. Factoring in labor-force growth of about 1% per year, U.S. annual gross domestic product can grow by 3.5% or better over the long run without worrying about overheating.

Here to read more.