A Screeching Halt?

a plausible scenario for the economy

During last week’s Zoom meeting with subscribers (no meeting tonight, by the way), I brought up an economic scenario that I call the Screeching Halt.

Usually, when you look at monthly changes in payroll employment, there is a lot of momentum. Following up on analysis by Edward Leamer in his book Macroeconomic Patterns and Stories, I looked into this several years ago.

I arbitrarily set the following cutoffs:
under 50,000 jobs gained per month = low job growth
between 50,000 and 350,000 jobs a month = normal job growth
over 350,000 jobs a month = high job growth

I have 603 observations of three-month averages followed by one-month values.

327 have medium job growth in the three-month period followed by medium job growth in the next month.
112 have low job growth followed by low job growth
63 have medium followed by low
45 have medium followed by high
33 have low followed by medium
14 have high followed by medium
8 have high followed by high
1 has low followed by high (December 1970, looks fluky)
0 have high followed by low

Note the line that I put into bold. We have never, ever, had three months with an average increase over 350,000 jobs followed by a month with less than 50,000 jobs created. But I think there is a 20 percent chance that we will see that happen when the September data show up next week.

Why might we see a screeching halt?

The rise in mortgage rates has brought the housing market to a standstill. If you’re a buyer, you cannot afford the monthly payment on a 6 percent mortgage. If you own a home, do you want to get rid of your 3 percent mortgage by selling? Right now, it is a terrible time to either buy or sell.

A decline in home sales volume hurts other businesses: moving companies, furniture, appliances. Leamer used to say that the business cycle is housing.

The fall in the stock market has already crushed the venture capital industry. They are stuck with an inventory of unsold start-ups.

For some time, we have had a “dual economy.” There is the large corporate sector, which has been growing, and a small business sector that has been in a state of decline. Think of Walmart displacing local grocery stores and Amazon displacing small retail stores.

Right now, the big corporations are looking to cut costs in order to show Wall Street better earnings. And the small business sector is being squeezed by increased costs, especially for labor.

Suppose that we do have a Screeching Halt, with layoffs in the large corporate sector and in housing-dependent businesses not being offset by increases in employment in the small business sector. Will that bring inflation to a screeching halt? The Phillips Curve would say yet, but I would say no. I think it will take a while for inflation to settle down.