The long-delayed September employment numbers are finally out, and the news is mixed, much as expected. The economy added 119,000 jobs, while the unemployment rate ticked up slightly from 4.3% to 4.4%, still close to what the profession calls the natural rate, or what most people would simply call full employment. That's obviously not the best picture of the labor market. As always, the broader U6 measure gives a clearer picture of labor market slack (in my understanding), and it stands at 8%. We still don’t have the official October numbers, but private-sector estimates suggest a much weaker figure, around 40,000 jobs, driven partly by continued losses in manufacturing and in federal employment. The only clearly expanding sector remains health services.
This labor-market softness, that led to the earlier firing of the head of the BLS (will Trump fire someone else?), reinforces something I’ve said for a while here in the blog. The economy is slowing, but we are not yet in a recession.
Meanwhile, inflation continues subdued rather than accelerating. The September CPI report shows year-over-year inflation at 3%. Importantly, the largest price increases, electricity and utilities, used cars, and medical care services, other than shelter (more on that below), have nothing to do with tariffs. Studies suggesting tariffs added roughly 0.7 percentage points to inflation seem plausible, but that is far from the stagflation many predicted. If there is a remaining inflationary concern, it is shelter costs, driven not by tariffs, but by structural housing shortages and, in the short run, the Fed’s high interest-rate policy, which keeps mortgage rates, and rents, elevated.
Paradoxically, the Fed is now sustaining inflation by keeping rates high, and by bringing them down too slowly (perhaps the only thing I would agree with Trump*), while also risking a recession by tightening consumer credit and depressing construction. Consumption has already flattened (from last CEA report). At the same time, government spending, which continues at a healthy pace, and bubbles in crypto and AI continue to prop up activity.
Affordability concerns (see Mamdani's election and Trump's decision to reduce tariffs) remain real, but they have less to do with inflation per se, which has fallen sharply since late 2022, and more to do with the fact that real wages at the bottom, although rising (above CPI for non-supervisory employees), start from very low levels. People feel squeezed because they are squeezed.
That won't change any time soon. Trump is bound become very unpopular (in many ways, he already is), and his policies will not help people at the bottom. Dems don't need to do much, actually. Perhaps avoid self-inflicting wounds. [Unpopular view here: the shutdown was a mistake they should have avoided, since there was no way of winning; Trump wanted to shutdown the government, because Republicans do NOT care if it doesn't work. Cut medicare? No problem. Cut SNAP? Go ahead. But these callous policies will make them very unpopular].
Let me conclude in a more cheerful mood. For me that is. So here’s a small victory lap. The dire predictions that high tariffs would produce stagflation were wrong. Tariffs are now at their highest average level since the 1930s, around 17%, up from 2%, according to the Yale's Budget Lab, yet they did not trigger either runaway inflation or a recession on their own. Stagflation is NOT the elephant in the room. If we want to avoid one, and if we are serious about affordability, for both reasons, contrary to conventional wisdom, the Fed should begin cutting rates sooner rather than later.
* Obviously that doesn't mean I'd agree with his intervention at the Fed (we will know more on that once the SCOTUS rules on that next year).
No comments:
Post a Comment