The Fed Governors should be happy with Friday’s unemployment report—nothing has really changed over the past several months, including record low unemployment, inflation continuing to decline, and average hourly wages holding at 4.4 percent.
“Both the unemployment rate, at 3.5 percent, and the number of unemployed persons, at 5.8 million, changed little in July. The unemployment rate has ranged from 3.4 percent to 3.7 percent since March 2022,” said the BLS press release.
We are in August and still no sign of a recession. Gross Domestic Product is estimated to grow even higher this quarter—as high as 3.9 percent from 2.4 percent in the second quarter, according to the latest Atlanta Federal Reserve GDPNow estimate. And companies are struggling to find more workers.
Why the sudden growth spurt? Even Nobel laureate economist Paul Krugman is calling it a Goldilocks economy.
“Economic policy in 2021 was actually pretty good. In fact, given the dislocations associated with a continuing pandemic, we ran what was in effect a Goldilocks economy, one that was neither too cold nor too hot.”
The sustained low unemployment rate is truly historic. Unemployment has declined to 3.5 percent only two other times—in 1955 during the post-WWII boom and 1969, the year of the first moon landing.
Education & healthcare led the report with 100,000 jobs added, but I like the construction jobs numbers best. This is because they show the effects of the recently enacted Infrastructure and Jobs Act and Inflation Reduction Act that are pouring $$trillions into real projects that are creating high-paying jobs. The problem—finding the workers.
Construction employment continued to trend up in July (+19,000), in line with the average monthly gain of 17,000 in the prior 12 months. Over the month, job growth occurred in residential specialty trade contractors (+13,000) and in nonresidential building construction (+11,000), per the BLS press release.
So why the recession worries at this stage of the recovery? It seems to be because of the much talked about inverted Treasury yield curve when short term rates (such as the 2-year Treasury) yield a rate much higher than the 10-year benchmark Treasury for an extended period of time.
It means credit is tighter, because lenders such as banks tend to lead at rates close to the 10-year benchmark Treasury yield, which is currently around 4 percent, but borrow at the usually lower 2-year rate that is now higher at around 4.8 percent.
When their cost to borrow is higher than what they can earn on their loans, lenders simply have less money to lend, hence tighter credit conditions.
That is happening because of the Fed’s credit tightening moves (that have driven up short-term rates). But the federal government is providing many more $$ to spur the economic renewal. Its current quarterly funding request is for $1 trillion to fund all those government projects that will pay for the future health of our economy.
Then why the credit downgrade by Fitch Ratings that has markets worried? Because debt rating agencies obsess about unmanageable debt. Yet, as the above FRED graph dating from 1930 shows, the actual annual deficit as a percentage of Gross Domestic Product is more important than the actual debt-to-GDP that has grown to 120 percent, because it shows the US can easily pay for said debt. Its ratio today is 5.8 percent and declining.
Dips below the zero-deficit straight line are deficits in the graph. The deficit has come down sharply from the negative -14.9 percent in 2020 because of the pandemic due to our strong economic growth since the pandemic.
Harlan Green © 2023
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