The employment report – Hurricane despair

It´s likely that the hurricanes that battered parts of the country were responsible for the first negative payroll in more than seven years.

However, bars and restaurants will reopen cars vans and trucks and other durables replaced, so the coming months are likely to show a bounce back from the hurricane’s effects and a stimulus as rebuilding gets underway.

Bad ideas, however, never die. Below examples of typical comments that reflect the Fed´s views

  1. “From our perspective, there is roughly only 1.3 individuals for every job opening and wage gains are in the pipeline with some inflation trailing behind.”
  2. “Sub-4% unemployment is in sight, and no one at the Fed thinks that can be sustained without triggering higher inflation. In short, then, the soft payroll number will be ignored at the Fed; unemployment is what matters, and this report therefore makes a [December] rate hike even more likely.”

The unemployment rate is determined by the ratio of the employment/population (EPOP) to the labor force participation rate (LFPR). Today´s unemployment is the about the same as it was in 2000. The EPOP/LFPR is also about the same. Note, however that both the EPOP ratio and the LFPR are much lower.

That leads to considerations like this one at the NYT: Why Some Scars From the Recession May Never Vanish:

“The signals say the recession is over, but employment is not back to normal,” Mr. Yagan said. “Recession effects aren’t supposed to last this long.”

Indeed, traditional economic theory has held that the damage from recessions is usually short-lived. For most of the 20th century, the nation bounced back quickly from downturns, with displaced workers quickly finding new jobs. Some economists even hailed recessions for their “cleansing” effects, purging unproductive companies in much the same way that forest fires burn up dead wood and release seeds that provide new growth.

The recession brought those determinants down, not structural/demographic factors. In addition, it is criminal to say the much lower level of both the EPOP and LFPR is the consequence of opioids and video games!

The lingering “scars” are a direct reflection of the depression in which the economy has remained following the total absence of anything that could be called a recovery.

As the charts indicate, as soon as Bernanke took over from Greenspan, an oil shock reduced real output growth (RGDP) below trend. Later, fearful of the inflationary consequences of the oil shock, Bernanke led the strongest monetary tightening since 1937, with nominal spending (NGDP) growth going into negative territory and the economy thrown into the deepest recession in living memory.

No attempt was made to get the economy back on trend (recover). The recession has defined the new level path the economy will follow, in effect keeping “some scars from the recession” in place.

The Fed signals this will not change. Worse, they consider a new path downgrade necessary!


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