EDITOR'S NOTE
Let's review some recent headlines. "Companies unexpectedly cut 301,000 jobs in January as omicron slams labor market, ADP says." "After a huge year of growth, the U.S. economy is about to slam into a wall." "Opinion: The 'interest rate comet' is about to slam into the U.S. economy."
Yikes. Sounds like the rebound is over, the Fed is making a historic tightening error, and maybe even a recession is coming.
Or is it? Let's unpack these developments, starting with the labor market. We're likely to get not just ADP's ugly report this morning, but also the official Labor Department report on Friday showing either meager job gains or outright job losses last month. White House and Fed officials have already been warning as much.
But omicron-related losses are a small setback in what has been a surprisingly rapid labor market recovery. The slowing pace of job gains in recent months makes sense if you look at how quickly the prime-age (25 to 54 years old) labor force participation rate has rebounded. We've gone from 83% pre-pandemic, to sub-80% in April 2020, back up to 82% as of December.
Contrast that with the financial crisis, when the rate peaked at 83.3% in early 2008, and declined for the next five years. It didn't bottom until September of 2015, around 80%, and we didn't get back to current levels of about 82% until late 2017--eight years after the recession ended! (Chart here.) This has been a much more rapid labor force recovery, with much stronger average hourly earnings growth--up 4.7% for the year through December.
And for it's worth, the high-frequency jobs data aren't flashing any warning signs. Jobless claims were just 247,000 on average for the four weeks ending January 22nd--during the peak of the omicron surge. A year earlier, they were running around 850,000 a week. The "continuing claims" series is currently at its lowest level since 1973. Does not jibe with a jobs market that's falling out of bed.
What about GDP? The Atlanta Fed's gauge points towards growth of just 0.1% for this quarter! But we're only a month in. We just grew almost 6% last year in "real" terms, or 10% including inflation. And that's reflective of the huge nominal demand surge we've experienced as a result of the Fed's emergency pandemic measures. The ISM manufacturing survey came in strong yesterday, "consistent with [real] GDP growth of 4.1% at an annual rate," or twice the "sustainable trend" for the U.S. based on productivity and labor force growth, wrote MKM Partners' Michael Darda.
In other words, you could almost make a case that GDP is too strong, not too weak right now. Hence the Fed's scramble to tighten policy. Recall that same ISM survey showed an unwelcome eight-point rebound in the "prices paid" index to a level of 76, which sent global bond yields spiking yesterday morning. These leading gauges of inflationary pressures are supposed to be "peaking" right now, not still rising. Meantime oil is back near $90 a barrel--an eight-year high--and apartment rents have gone from rising 2% a year pre-pandemic to soaring 18% over the past twelve months.
So if anything, it's a gift that our long rates remain relatively calm right now. The 10-year Treasury yield is still under 1.8%. That means the U.S. government is still paying pretty low rates on our national debt, which just crossed above $30 trillion for the first time. Peter Tanous is right--if rates went back to where they were in, say, the early 2000s, the interest we'd pay on that debt could easily triple (hence the "interest rate comet" referenced above). Can you imagine the fights in Washington over how we'd allocate budget to that?
Given the myriad ways this could all still go haywire, it's a surprisingly "goldilocks" kind of moment right now.
See you at 1 p.m!
Kelly
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Rabu, 02 Februari 2022
Here come the Omicron job losses
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