The Fed is playing catchup, thanks to the ever-changing economy and pandemic.
That they’re in the role of the proverbial tortoise, in an existential race versus hare-raising inflation and stubbornly persistent unemployment, is a no-brainer.
The only question is, will the world’s largest and most advanced central bank recover to overtake events of great consequence — or will those economic trials and tribulations force a reckoning, namely:
Is the Federal Reserve still relevant?
The surprising pace of recent job growth may be catching recent headlines. But, as Neil Irwin points out, other details contain the biggest implications for markets in the months ahead; namely, wage growth.
Neil Irwin reminded us yesterday morning that a lot of hopes are riding on inflation easing this year. But it hasn’t happened yet—or over the last year.
Consumer prices surged more than expected over the past 12 months, suggesting a bleak outlook for inflation and increasing the likelihood of more than a few interest rate hikes this year.
The CPI (all urban index) rose 7.5% in January over a year ago, the Labor Department reported yesterday—the highest since February 1982. Economists were expecting an increase of 7.2%.
The so-called core CPI, which excludes volatile food and energy prices, increased 6%, compared with the estimate of 5.9%—its highest since August 1982.
Wow, talk about exceeding expectations
Job growth was up much higher than pundits expected in June, as reported today by the government.
According to the Bureau of Labor Statistics, nonfarm payrolls increased by 372,000 over the month, way stronger than economists’ consensus estimate of 250,000.
The BLS’ U-6 unemployment rate that includes discouraged workers and those holding part-time jobs for economic reasons dropped to 6.7% from 7.1% (the underreported U-3 headline rate remained unchanged at 3.6%).
Civilian labor force participation was essentially flat, falling slightly to 62.2% from 62.3% but still remains more than a full percentage point below the level seen just before the pandemic started in 2020.
Total civilian employment – at 158.1 million – actually fell somewhat in June and was still close to 800,000 below its February 2020 level.
Average hourly earnings increased 0.3% for the month and were up 5.1% from a year ago, indicating that wage pressures remain strong as brisk inflation sails along.
Among the unemployed, both the number of permanent job losers (1.3 million) and the number of persons on temporary layoff (827,000) changed little over the month.
The number of long-term unemployed – i.e., those jobless for 27 weeks or more – was essentially unchanged at 1.3 million. This measure is 215,000 higher than in February 2020.
The long-term unemployed accounted for 22.6% of all unemployed persons in June.
Interestingly, 7.1% of employed Americans teleworked (worked mainly from home) because of the pandemic, down from 7.4%.
Another 2.1 million people reported that they’d been unable to work because their employer closed or they were laid off thanks to the pandemic – up from 1.8 million in May.
By sector, education and health services led the job added, with 96,000 hires, while professional and business services added 74,000 positions.
What do these numbers mean?
The Fed, the Bank of England and the European Central Bank all raised interest rates this week again to fresh multi-year highs.
They just can’t seem to help themselves.
At the same, they each suggested or explicitly warned that there is more tightening coming plus a willingness to hold their policies at hawkish levels for a while.
They just can’t seem to help themselves.
Let’s focus on the Fed. Inflation and all of its major drivers fell in the last half of 2022.
I’m not going to say it fell sharply, steeply or significantly, because some prices have come down – some even sharply, some just a tad – and some have not at all.
The so-called price deceleration occurred despite the pace of economic growth, which picked up in the second half of the year and unemployment remained fairly static.
We know that the goal of the Fed’s statutory dual mandate is to balance the risks of inflation versus the benefits of solid economic growth and maximum unemployment.
Jeremy Bivens points out that currently, “the benefits of low unemployment are enormous, and the risks of inflation are retreating rapidly.”
Here’s what he wrote before the Fed’s 25-basis point rate hike on Wednesday:
“If the Fed lets the current recovery continue [quickly] by not raising interest rates further at this week’s meeting, 2023 could turn out to be a great year for the economic fortunes of American families.
“It is time for the Fed to stand pat on interest rate increases and wait to see how the lagged effects of past increases enacted in 2022 will filter through to the economy.
“Continuing to raise rates in the early stretches of 2023 will be a clear mistake and pose an unneeded threat to growth in the next year.”
He envisioned a Powell press conference after a meeting at which the Fed decided to leave rates alone, emphasizing these points:
In one of its banner anthems from the early 2000s – “Roll with the Changes” – the popular classic rock band REO Speedwagon belts out the sing along chorus, “Keep on rollin’, keep on rollin’…”
NY Times columnist David Brooks seems to feel the same way about the American economy.
In a recent column, he observed: “You can invent fables about how America is in economic decline…But the American economy doesn’t care. It just keeps rolling on.”
Brooks’ colleague David Leonhardt notes that when it comes to economic innovation and productive might, no country can match the U.S. – with Apple, Google, Amazon, Tesla and OpenAI blazing new trails.
Leonhardt writes, “The standard measure of a nation’s economic performance is per capita gross domestic product — the value of the economy’s output divided by the size of the population.”
He points out that even as China’s share of global GDP has skyrocketed over the past few decades, the U.S. still comprises virtually 25% of worldwide output – about the same as in 1990.
But as Nobel laureate and economist Paul Krugman reminds us, GDP doesn’t measure everyday Americans’ standard of living.
Because per capita GDP is an average, it can be distorted by outliers. One major example: income inequality in the U.S. is significant, which means the wealthy own a much larger share of output than in other countries.
As Leonhardt points out, per capita GDP in the U.S. has risen 27% in the new millennium – from around $50,000 in 2000 to a little over $60,000 at the end of 2021 (it was less than $25k in 1970).
“But median household income has risen only 7%,” while income for the top 0.1% of earners has [soared] 41%.”
Broader quality of life metrics show even more clearly how the U.S. isn’t looking so good relative to other comparable nations.
Leonhardt notes we have the lowest life expectancy of any high-income country, with “uniquely poor access to health insurance and paid parental leave.”
Krugman says, “It’s always important to bear in mind that GDP, at best, tells us how much a society can afford.
“It doesn’t tell us whether the money is well spent; high GDP need not translate into a good quality of life. Individuals can be rich but miserable; so can countries.
“And there are good reasons to believe that America is using its economic growth badly.”
Leonhardt thinks it’s a mistake to see the economy as separate from living standards:
“The unequal American economy continues to churn out an impressive array of goods and services while also failing to deliver rapidly improving living standards. And polls suggest that most people aren’t fooled.”