Storm winds whip down a pass, stirring the valley below, making people uneasy, sending confusing signals. That is what economic data is doing. Is our economy rising or falling, what is the real trajectory? Some thoughts.
First, we just got a “good” employment report – 943,000 new jobs, unemployment down to 5.4 percent. But what does that mean? On the plus side, seeing travel, restaurants, hospitality grow is hopeful. People are getting out and about. See, e.g., U.S. Economy Added 943,000 Jobs in July, Unemployment Rate Fell to 5.4%.
On the other hand, cold gusts abound. We continue to “dig out of a hole.” US unemployment in July 2019 – six months before COVID – was 3.5 percent. Between June 2015 and July 2019, unemployment was never as high as 5.4 percent. So 5.4 percent is nice, but nothing to write home about. Pre-COVID, four prior years were better.
Look through another lens. Yes, the economy has created 4.3 million jobs this year, but we remain 5.7 million jobs below February 2020 – a lot to recapture. Moreover, one-quarter of the “good” report is “government” jobs. From 2008 to 2018, state budgets got tight. COVID compounded job cuts. New federal money is buying back jobs. Nice, no cause to celebrate.
As an aside, government jobs do not “make” things, even if vital. The multiplier effect – number of times a product made generates added jobs – is lower with government jobs. Teachers and law enforcement fell in 2020; teachers are coming back, law enforcement not so much. See, e.g., Nearly All States Suffer Declines in Education Jobs; Nearly All States Suffer Declines in Education Jobs.
Finally, the latest report masks added facts. Labor participation is low, in contrast to record participation from 2017 to 2019.
Why? Generous state and federal unemployment benefits, free money, eviction waivers, other freebies – $6 trillion now disincentivizing labor participation.
Ironically, that fact tightened the labor market, driving up wages. What does that mean? It means those who choose to work are getting more. That, in turn, tells us time to stop paying people for doing nothing and affirms markets’ work. We do not need an artificially high minimum wage if wages respond to demand for labor. Right? Less government is better.
Inflation is rising. The more federal spending, the higher the national debt goes (now approaching 30 trillion), and less our dollar is worth since more paper chases less real wealth. Of course, the pending $3 trillion-dollar “infrastructure” bill, driven by one-party government, does not inspire further confidence.
As inflation rises, affecting gas, lumber, steel, everything, something else happens. Real wages – purchasing power of what we earn and save – falls. The means we earn less and pay more, a drag on quality of life, economic security, growth.
In 2018, inflation was 1.9 percent, in 2019 2.3 percent, in 2020 1.4 percent. In 2021, 5.4 percent. Answer:
Stop federal spending.
Inflation is accelerating for another reason, energy costs. While Democrats push distant energy dreams, we live right now.
Killing fossil fuel exploration and production, Biden has single-handedly ended US energy independence, making the US dependent on hostile OPEC.
As 2020 COVID recedes, energy demand creeps up, and higher prices are being paid for energy – everywhere.
Energy is just one accelerant for inflation, but big – since used in producing everything. See, e.g., Energy Inflation Gathers Pace As EU Gas, Power Surge To Record. Expect higher gas and oil prices this winter.
Fourth, while inflation rises, we now face another headwind: Competing with post-COVID recovery, we now confront fear of new lockdowns, civil and economic restrictions. These are attributable to fear of a “delta” variant.
Weaker but easier to acquire, the variant will slow the economy, at least temporarily. How much? No one knows, but new restrictions are coming.
Fifth, the Federal Reserve is uneasy, unsure as the rest of us. On one hand, they want modest inflation, tracking modest real growth, but in truth, they cannot project how fast inflation will rise or how high go.
They do not know. Worse, their policies typically lag reality.
If inflation rockets, they will raise interest rates. If the “delta” variant, or God forbid some politically inspired “mega” variant in 2022, slows the economy, they will need to double back, revise predictions, disavow rate increases. Truth is, the Fed is not good at predicting where the economy will go and is always slow. Expect markets to be jittery if fresh uncertainty replaces confidence and if predictability gives way to baffling crosscurrents.
Where does all this leave us? In some ways, we are left looking forward with more uncertainty than last year. If fear of the delta variant fades (as it should), the economy will grow. If excess federal benefits stop flowing, people come off the bench to work at higher wages; the economy will grow. If wild federal spending stops – a very big “if” – fear of inflation may quiet.
But also possible:
Fear of COVID variants may continue, fanned by politicians, slowing the economy. Unjustified federal benefits may flow, disincentivizing labor participation. Massive Federal spending may go unchecked with one-party government until people shout “enough!” Those developments would all buffet economic growth.
In the end, all politics are local, and much economic decision-making is too. Economic decisions boil down to collecting data, thinking about what you have and want, then making choices. America is a country that likes to work, works hard when given a chance, so growth is probably the better bet – if government will just get out of the way and give Americans the chance.
That said before we wrap – two cautions. Conservative economist Milton Friedman reminded us, “the combination of economic and political power in the same hands is a sure recipe for tyranny.” Colin Powell, for whom I worked, reminded us that every decision you make is made on incomplete information; you still need to make the decision – even in crosswinds, downdrafts, storm in the mountain pass.