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No, the U.S.

Isn’t Overheating
Peter Coy

Want ads for truck drivers to haul crude oil in Texas are touting salaries as
high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S.
unemployment rate just fell to 3.9 percent, one tick away from its lowest since the
1960s. And on May 8 the Bureau of Labor Statistics reported there are 6.5 million
unfilled jobs in the U.S., the most on record. Some employers say they’re feeling the
squeeze. “Rising labor costs remain the primary contributing factor to our margin
erosion,” Chatham Lodging Trust, a company in West Palm Beach, Fla., that owns
more than 130 hotels either by itself or in joint ventures, said on May 1.
Is the U.S. economy overheating? Yes and no. There are plenty of inflationary
bottlenecks, and not only in the labor market. Backlogs of orders are the highest since
2004, according to the Institute for Supply Management. Transportation costs have
jumped in part because of driver shortages. Strong U.S. oil and gas production has
helped push up the prices of essential inputs such as steel pipe and specialty sands
used in fracking.

On the other hand, the bottlenecks aren’t yet causing high inflation across the
economy, which would require the Federal Reserve to speed up its interest rate hikes.
The U.S. central bank passed up the opportunity to raise the federal funds rate at its
May 1-2 meeting while noting that the rate of inflation has “moved close” to the bank’s
2 percent target. “In my judgment, the Fed is ready to accelerate [rate hikes] if they
need to, but they’re not getting ahead, which I think is appropriate,” says Josh Wright,
chief economist at ICIMS Inc., which makes software to find and hire talent.

Some of the factors driving up the U.S. inflation rate—in particular, the jump in
crude oil prices to about $70 a barrel from less than $50 a year ago—have external
causes and don’t reflect overheating in the domestic economy. Rising commodity
prices caused in part by new steel tariffs cost General Motors Co. and Fiat Chrysler
Automobiles NV at least $200 million each in the first quarter. Tariffs have also helped
drive lumber prices to a record. Other external factors are the high price of imported
alumina for aluminum smelters and the weather-related runup in prices of vanilla
from Madagascar and cocoa from Ivory Coast and Ghana.

The U.S. economy performed below capacity for so long that it can be hard for
managers to remember how to operate without lots of spare resources. Half of the
surveyed members of the National Federation of Independent Business say there are
“few or no” qualified workers for job openings. Yet on May 8 the NFIB reported that in
April the net percentage of small-business owners who reported improved earnings
trends was the highest in the survey’s history. “There is no question that small
business is booming,” William Dunkelberg, NFIB’s chief economist, said in a
statement. (Big companies are, too: First-quarter earnings for companies in the S&P
500 are expected to be 24 percent higher than a year earlier, Bloomberg calculated on
May 9.)

Sectors with strong pay growth generally confront special circumstances. Those
truck drivers being offered as much as $150,000? They’re being hired by oil producers
in the Permian Basin who are desperate to get their crude to market. Hospitals, whose
median expenditures for contract labor rose 19 percent in the past year, face their own
special problems, according to John Morrow, a managing director of Franklin Trust
Ratings who analyzes hospitals. People whose skills are in high demand and work
under temporary contract rather than salary can take full advantage of shortages for
their talents, according to Morrow. “This is a level of skill that requires advanced-level
training that involves medicine, technology, and science, and all of those things are
costly,” he says.
An important sign that rising costs remain manageable is that most companies
haven’t passed them along to customers. Walmart Inc., the nation’s largest private
employer, raised starting wages to $11 an hour in January and announced annual
bonuses of as much as $1,000. But it’s cutting prices to remain competitive with Inc. and low-cost supermarket chains Aldi Inc. and Lidl US LLC. The
same goes for packaged-goods companies. General Mills Inc. has acknowledged that
attempts to hike prices for its Progresso soup and Yoplait yogurt ultimately hurt sales
by driving shoppers to other brands. In freight transportation, BNSF Railway Co. has
picked up market share from Union Pacific Corp. by underpricing it.

“We have to be a little bit cautious in inferring that wage growth is going to be a
major constraint for business,” says Gregory Daco, head of U.S. macroeconomics for
Oxford Economics Ltd. While some economists warn that rising inflation is a “late-
cycle” phenomenon—i.e., a precursor of recession—“we don’t have clear evidence that
we’re at the end rather than the middle of the cycle,” says Michael Englund, chief
economist of Action Economics LLC in Boulder, Colo.

A key statistic to watch is unit labor costs, which are wages adjusted for
productivity. They rose at an annual rate of 2.7 percent in the first quarter. But over
the past year as a whole, the increase was only 1.1 percent. As long as companies’
unit labor costs don’t rise faster than the prices they charge, tight labor markets won’t
be a problem.

The Fed’s preferred measure of inflation, the price index for personal
consumption expenditures, is going to look high for a few months because a brief dip
in prices for clothing, hotel rooms, airline fares, and other items has ended, says Ian
Shepherdson, chief economist of Pantheon Macroeconomics. That might influence the
Fed, he says. There’s a risk that Fed rate setters could react too quickly to signs of
overheating. “As inflation climbs, so too will the risk of recession, because at some
point policymakers will feel impelled to respond,” Ellen Zentner, chief U.S. economist
of Morgan Stanley, wrote in a note to clients on May 2. —With Katia Dmitrieva,
Tatiana Darie, Craig Giammona, and Jamie Butters

This article talks about how The U.S. economy is affected by the inflation rate
and how will the inflation growth climbs the risk of recenssion. The inflation rate
almost hit the perfect percentage which according to the banks is 2 percent. The U.S.
inflation rate is driving up because of some factors such as the jump in crude oil
prices, the high price of imported alumina. We are also informed that small business
is booming.

Sectors with strong pay growth were those that were desperately needed by the
society such as medical sector. Big companies like Walmart, Amazon and Lidl were
affected by the salary growth, Walmart announced the it will offer an annual bonus of

Vocabulary work

 Overheating = too much very fast growth in an economy, with the result
that prices increase too quickly;
 Backlog = a large number of things that you should have done before and
must do now;
 Bottleneck = a problem that delays progress;


The reason that made me choose this article was the fact that I wanted to put in
the spotlight that even the most powerful economy on the planet has its own issues to
deal with. Even though The U.S. is a model, an example for every country’s economy,
it also has its own problems such as the inflation rate that is too big, artificially pay
growth in some sectors that affects the whole country’ economy.