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I spend a good part of most days following the news and key economic and financial market indicators. When I see Fed governors quoted as saying things like "the labor market is still strong," or "inflation is still too high," I begin to wonder if they even bother to look at the numbers themselves. I suspect they don't devote nearly as much time and effort as I do. Which is disconcerting, to say the least.
In the same vein, how can the editors of the WSJ allow a front-page article in today's edition to assert that "Household spending [is] the primary driver of economic growth"? You mean that if we all just spent more we could all get richer? That's ancient and totally debunked Keynesian thinking—it's impossible to spend our way to prosperity. Growth comes from producing more with the same amount of inputs, and to do that you need to work harder, invest, and take risk. Or you need to find more people and put them to work. On a global basis, we can never spend more than we produce—unless, of course, central banks hand out monopoly money to create the illusion that our purchasing power has increased.
Chart #1 shows the level of private sector non-farm employment, plotted on a log scale to highlight growth rates. I focus on private sector jobs because those are the ones that deliver improvements in our standard of living. As a side note, the number of public sector jobs today is about the same as it was in 2008, 15 years ago. Thank goodness for small favors.
Chart #1
As you can see on the chart, the rate of growth of jobs has been decelerating over the past few years (i.e., the slope of the line is getting flatter). On a year over year basis, private sector jobs were growing at a 4.8% rate a year ago (August 2022), whereas they have grown only 2.0% in the year ending August 2023. On a 6-mo. annualized basis, jobs growth was 3.4% a year ago, and now it is only 1.5%. Based on these numbers, it would be fair to say that in the past year the economy has lost over half of its vitality.
Jobs today are growing at about the same rate as they did in the years just prior to Covid, and they show every sign of continuing to decelerate. This is by no standard "too strong." It's more like average-getting-worse. Today's jobs growth is sufficient to deliver real GDP growth of 3% at best, but more likely something equal to or less than the 2.1% rate we have seen since mid-2009—years that featured decidedly sub-par growth from an historical perspective.
How can a Fed governor look at these numbers and think that the economy is too strong? If anything, these growth numbers should prompt concerns that the Fed has already tightened too much. Especially when you consider, as I did in my previous post, that inflation has already fallen to 2% by some measures.
15 comments:
Bravo.
According to Ken Fisher if imputed rent is deducted from CPI formula, the last month CPI is not 3%, but only 0.8%.
Are you worried about a recession?
The biggest impediment to job growth right now from my perspective are demographically driven. For our portfolio of companies, our biggest 3-5 year challenge is finding the workers to replace retiring baby boomers. An intelligent (as opposed to political football for both parties) immigration approach would be enormously helpful in this regard - not to hold wages down, but to fill open, high wage positions.
The good news side of this is much greater capital expenditures that are making US companies world class competitive and are utilizing skilled labor in a higher and more productive manner. The additional good news is that more younger people are looking at skilled manufacturing and skilled trades as the very attractive options they have become from an earning and career path perspective.
Tom
Of course you are right. Your comment about the WSJ is exactly why I do not read or listen to the news any more. It's the Gell-Mann Amnesia effect.
Yes sir, job growth deceleration is a very big deal. As our population ages and birth rates continue to decline, finding enough workers will become an even bigger problem down the road.
Contrary to Dr. Steve Hanke: "WSJ" Aug 5th, 2021 the injections of funds from O/N RRPs are not liability swaps. That is only true for banks.
"Of course, if the buyer of a reverse repo or a security sold by the Fed is a nonbank and pays for the purchase using its bank account, the money supply is directly affected." - Chicago FED's "Modern Money Mechanics".
The award rate on O/N RRPs is 5.30% for $1,574.065 on 9/1/23. The rate on 3mo T-bills is higher. Thus, funds have come out of the O/N RRP. There’s been a $734b drawdown since 4/24.
Where do you think interest rates would have been without those funds?
alpacino, re recession likelihood: I worry somewhat about a recession, given the bad policy mix the economy faces: relatively high interest rates, heavy tax and regulatory burdens, and huge transfer payments are chief among the policies that are harmful. But for now I don't see the warning signs that would suggest there is a recession around the corner. Money is still in abundant supply, credit spreads are generally quite low, the Vix "fear" index is only moderately elevated, the dollar is relatively strong, and commodity prices are only moderately down in the past year. The yield curve is inverted, and many, myself included, know that most recessions are preceded by an inverted yield curve. While an inverted curve is arguably necessary for a recession to occur, it is not, however, sufficient. You also need to see high and rising real yields (e.g., 3-4%), significantly rising credit spreads, and liquidity shortages. None of those are present at this time.
Dear Scott,
From previous comments, you'll know I endorse your views. What I'm not getting is that the long bond still seems bid less despite Euro zone PMIs in contraction, China near a serious deflation, and all the information you've provided since the beginning off the year. What am I missing?
Clay
Clay, re long bond yield: I think the relatively high level of long-term Treasury yields is due almost entirely to the market's perception that the Fed will keep rates high, and possibly higher, for longer. This perception, in turn, is driven by recent data showing some indicators are somewhat stronger than expected, and notoriously, the Atlanta Fed's GDP Now forecast, which calls for growth in the current quarter to be an astounding 5% or more. In short, the market is spooked by the idea that the economy is "running hot" and therefore the Fed needs to be tougher. Because, of course, it is "common knowledge" that inflation can't come down if the economy is healthy—we need a weakened and subdued economy to stamp out inflation. I say this with tongue in cheek of course, because growth has nothing to do with inflation. Unfortunately too many people cannot disabuse themselves of Phillips Curve thinking. In any event, these conditions are not likely to persist for much longer.
I'm confused by your comments regarding total Federal debt relative to GDP. According to the St. Louis Federal Reserve, Federal debt as a percentage of GDP was a little over 60% in 2008 and is now a little over 120%, and the current proposed budget will send it higher. That is obviously not a sustainable trend.
pmcw, re federal debt relative to GDP: Too often people use "Total Federal Debt Outstanding" instead of "Debt Held by the Public," which is the only one that matters. The former includes debt the government owes to itself (mainly social security funds which have been "borrowed" by Treasury, now about $6.8 trillion); so it essentially engages in some doubling counting. Debt Held by the Public is the one to focus on and it is ≈ now about $26.1 trillion, just shy of nominal GDP. See the data here:
https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
And unfortunately the federal deficit is firmly on track to reach $2 trillion this year. We really need to return to some semblance of fiscal sanity, and that applies to both parties.
Thank you for your inputs Scott. Like you, I typically get my data from Treasury, MTS and Fred, or as close to the source as possible. I've wrestled with whether or not to count the non-negotiable bonds held by "trust" funds (OASDI, Civil Service, Defense, Medicare and a few others).
I get what you mean by double-counting. However, I then go back to the thinking that all of those debts held by trust funds have to be paid by taxpayers just like debt held by the public. If the funds were not in those trust accounts (there was no money in trust funds to borrow), the government would have to use publicly held debt to finance the aggregate deficit. In other words, the public debt is the taxpayers' right pocket and the trust fund debt is the taxpayers' left pocket. So, with those points in mind, how is it double counting when we include trust fund debt? To that end, I would appreciate some inputs.
Of course, either way it is viewed, as 100% or 120%, it is bad. Worse yet is the trend of continued deficit spending we both cite. And I totally agree that both political parties have contributed to the problem.
Re "double counting" federal debt:
Consider this example: Company A has two divisions, Division B and Division C. Division B for years has had positive cash flow (i.e., receiving more than it has to pay out), whereas Division C has had negative cash flow (i.e., spending more than it receives). Division C's cash outflows are much larger than Division B's cash inflows, with the result that Company A has had to issue debt to cover the difference. Meanwhile, Company A has been accounting for this by directing Division C to borrow Division B's cash surplus, in recognition of the fact that Division B has been prosperous whereas Division C has been profligate. According to the company's books, Division C owes Division B money.
Would it be proper to say that Company A's outstanding debt is equal to its actual borrowings plus Division C's debt to Division B? Or would it instead by proper to say that Company A's outstanding debt is equal to Company A's debt issuance?
Now, substitute the US federal government for Company A, the Social Security administration for Division B, and Treasury for Division C. Treasury has been running a deficit for decades, and it has been "borrowing" money from Social Security in order to reduce the amount of debt that the Federal government has had to issue. In reality, all revenues from Social Security withholding and tax collections are thrown into the same pot. The deficit of that pot has been covered by selling Treasury debt that now amounts to about $26.2 trillion. Social security and a few other government agencies have collected about $6.8 trillion more than they have paid out, and that surplus has been used to finance general government spending. The true measure of the Federal government's debt is thus equal to $26.2 trillion. To add $6.8 trillion on top of that is akin to double-counting.
Scott, Thank you very much for your thoughtful answer. We certainly agree that debt is out of hand and the trend of deficit spending is not sustainable; the sooner it is reversed the better.
As I noted, I have wrestled with how to calculate the accumulated debt - total debt versus publicly held debt. I think both views have merit. Please bear with me as I share my views.
One of the many reports I still track (not nearly as often as I did when writing a newsletter) is the Monthly Treasury Statement (MTS). I began reviewing the MTS in the late 1990s and the charts shown at the front of the report led me to conclude exactly what you described. In short, I viewed government as a large multi-divisional company and loans between divisions were not company debt - just as you wrote. Here's the link to the July 2023 MTS: mts0723.pdf (treasury.gov)
However, as I began reading the Social Security Auditors' reports and learning more about OASDI (Old Age, Survivors and Disability Insurance), which includes Social Security, I also began questioning my original thesis of one big company. In the 1980s, Congress voted to increase OASDI tax (FICA) with the stated purpose of building up a surplus to cover what would eventually be a pay-go shortfall. This surplus would go into the Social Security Trust Fund where prior to the increase, there was minimal money.
The details are neither here nor there, but the crux of my dilemma is a Trust Fund by definition is owned by its beneficiaries. In the private sector, Trust Funds are managed by companies that commonly have fiduciary responsibility to the beneficiaries. The Social Security Trust Fund is managed by the Treasury. It's excess funds cannot be kept in a "Lock Box" or invested in the private sector, so the only alternative is for funds to be used by the Treasury and replaced with debt - in this case, non-negotiable Treasury debt. The only way this debt can be serviced / paid is by taxing the current and future beneficiaries of the Trust Fund.
I fully realize my views here are philosophical and the government does in fact legally operate like a multi-divisional company; as I envisioned it before and as you outlined. However, if we envisioned the government multi-division company as a private sector company, its Pension Plan (OASDI) would be a separate entity. Therefore, my philosophical view is the Federal debts held by the various retirement trust funds (pension plans) should be included as Federal debt in calculations.
I guess the primary difference in our opinion is who owns the money in Federal retirement trust funds. By current law, the auditor would agree with you, but if we assume a Trust Fund is owned by its beneficiaries, I think my view has merit.
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