This Monday, July 10, at 8 PM New York time, I will discuss with paid subscribers the current state of the economy. What happened to the much-anticipated Fed-induced recession?
Here are some readings on the topic, each offering a different answer. One says that the economy’s weakness may not be showing up in the data. Another says that the Fed is not really keeping money tight. And yet another says that the Fed’s higher interest rates may actually have a stimulative effect.
Gwynn Guilford (WSJ, probably behind a paywall) writes,
Economists usually look to the payroll survey as the most accurate, complete picture of the job market. But a handful of economists point to blind spots that mean it could be counting more jobs than are actually being created. ..
The monthly jobs report, usually published the first Friday of each month and watched closely by investors, policy makers and businesses, consists of two surveys. The payroll survey is based on a sample of more than 122,000 businesses and government agencies covering around 42 million workers—about 28% of formal employment. The household survey is based on a sample of 60,000 households.
The payroll survey showed a gain of 339,000 jobs, while the household survey showed employment falling 310,000 and the number of unemployed leaping 440,000 to its highest level since February 2022. ..
Historically, economists consider the payroll survey a more reliable indicator of labor market health, except at turning points in the economy.
For example, from 2007 to 2010, a period dominated by recession and a weak recovery, the payroll survey overstated jobs by a cumulative 1.7 million, as shown by subsequent, more comprehensive tax data.
Changes in total employment are affected a lot by new business formation. It turns out that the Bureau of Labor Statistics only finds out the true rate of new business formation with a lag. Meanwhile, it uses a statistical model to estimate new business formation. Maybe the model is over-estimating new business formation.
There’s no mystery here—easy money is generating fast NGDP growth, and that’s why core inflation remains stubbornly elevated.
He is looking at the latest figures for the first quarter, which show nominal GDP growth at 6.1 percent at an annual rate, and the Fed’s preferred measure of core inflation running at a 4.9 percent annual rate.
further rate hikes end up pouring more and more fiscal deficits into the economy by raising the Treasury’s average interest expense, which is ironically stimulatory to a certain degree.
The result thus far has been sticky inflation and delayed recession. The inflation has taken longer to get down than many people thought, but also, the potential for recession keeps being pushed out quarter by quarter longer than many people thought, due to the ongoing stimulatory effects of large deficits that are pushing against the recessionary effects on certain parts of the private sector.
As we look years into the future, the rising federal debts and deficits will cause the fiscal dominance to continue to increase, which means interest rates become a less and less useful inflation-fighting tool over time.
We can remain agnostic about which instruments the Fed should use to achieve its targets. It may will be that different circumstances -- deficits, supply shocks, demand shocks -- will call for different combinations of FF rates, QE, IOR, or even new instruments. What we should NOT do is allow changing circumstances to excuse the Fed from achieving it's targets or allow us to lose sight of the fact that deficits drain resources from investment into consumption.
Hi Arnold. I like your work, and also usually run out of time for podcasts. Will you be posting a write up / summary of what you think, re markets, behind the paywall? (I am a markets guy).