As Fed contemplates a move, Democratic states lag furthest in jobs recovery

3:30 pm Friday, November 19th, 2021

By Howard Schneider

WASHINGTON (Reuters) – Hopes to restore U.S. employment to its pre-pandemic level, an aim of the Federal Reserve and the Biden administration, now rest on a recovery of jobs in New England and California, a potentially troubling fact for the president’s Democratic Party ahead of critical midterm elections and as the Fed plots a possible turn to tighter monetary policy.

Data released on Friday show that through October employment in states with Republican governors was close to 99% of what it was in February of 2020, while Democratic-led states lagged, at roughly 96%.

While state-level estimates can be volatile, particularly month to month, the apparently larger remaining job shortfall in Democratic-leaning areas echoes the choices – and political divisions – that emerged early in the pandemic. States in the Northeast and mid-Atlantic tended to impose stricter measures against the coronavirus and keep them in place longer, than Republican-led states in the South and West.

Employment fell more sharply in those areas, and the gap has remained even late in the recovery.

Graphic: State decline and recovery in jobs – https://graphics.reuters.com/USA-ECONOMY/STATES/jnpwexzkgpw/chart.png

Recovery has come faster than many expected, but it remains uneven. Of 10 states that had more jobs in October of this year than in February 2020, seven had Republican governors and another six GOP-led states were within 1 percentage point of their pre-pandemic job level.

Graphic: A still disjointed recovery – https://graphics.reuters.com/USA-ECONOMY/JOBS/jnvwexybwvw/chart.png

The level of jobs alone doesn’t tell the full story, and on key measures like the overall employment-to-population ratio – considered a more complete measure of job market health than the unemployment rate – Republican strongholds like Texas and Florida remained well below levels seen before the pandemic crisis.

But the job level does pose a potential challenge for Biden, with important Democratic states like New York and California still 5% below the pre-pandemic peak, and political battlegrounds like Pennsylvania also lagging.

Until recently it seemed the Fed was intent on keeping monetary policy loose and borrowing costs easy for as long as it took to claw those jobs back.

That aim may now be in conflict with the Fed’s other goal of stable prices, challenged by a run of inflation that is prompting central bank policymakers to discuss a faster move to tighter policy – which could slow job growth before areas central to Biden’s political chances are able to catch up.

Those dynamics now appear as well to be central to Biden’s decision on who to place at the top of the Fed. Current Chair Jerome Powell’s term is expiring in February, and Biden is expected to make a decision within the next week on whether to reappoint him or replace him, most likely with Fed Governor Lael Brainard.

The high inflation rate, which has persisted longer than policymakers had anticipated, is damaging Biden’s approval ratings and elevating the importance attached to his choice of central bank chief.

(Reporting by Howard Schneider; editing by Jonathan Oatis)