At the virtual “Macroeconomic Policy in an Uneven Economy,” symposium on August 27th in Jackson Hole, Wyoming (the very best place to host a virtual symposium), the Chair of the Board of Governors of the Federal Reserve, Jerome H. Powell, summed up his presentation by stating that, “the baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2 percent over time.”
He is wrong.
And this is why.
On the employment front, the addition of just 235,000 new jobs in August brings the number of new jobs created so far in 2021 to 5.876 million (not seasonally adjusted) BUT 3.222 million (55%) of those jobs were in the lower-paying leisure and hospitality industry sector. August was the first month this year that NO net new leisure and hospitality jobs were added and with the peak summer gone past and winter fast approaching, employment will likely decline in this sector through the remainder of the year because that is what it always does.
The August job numbers highlighted that there were 8.556 million officially unemployed Americans and a further 5.810 million (total 14,366 million) who wanted a job but weren’t counted as officially unemployed.
It was also interesting to note in the report that there are now 6.783 million workers working multiple jobs, with 1.492 million (22%) working two full-time jobs concurrently, presumably to make ends meet.
A different report produced by the Bureau of Labor Statistics (BLS) highlighted that on the last business day of July, there were 10.9 million job vacancies. A record number. And more than one job for every officially unemployed American.
With 14.366 million Americans ostensibly looking for a job and employers unable to hire worker to fill 10.9 million job vacancies, it doesn’t seem like the economy is poised for “progress towards maximum employment”. Particularly given the looming specter or government and private sector employers potentially firing masses of unvaccinated existing employees in the months ahead, which they may find challenging to replace.
One final point related to employment is the dismal showing of the U.S. labor force participation rate. This rate, which highlights the percentage of the civilian non-institutional population above the age of 16 who are working or actively looking for work, had been in decline since the turn of the century although this was arrested a little during the full employment years of 2018 and 2019.
With the onset of COVID-19, approximately 8.0 million people abandoned the workforce almost overnight and while most of them have returned, so far 2.6 million haven’t, with no sign or prospect that they will return anytime soon.
The most distressing element of all is the fact that most of the people staying away from work are young and potentially able-bodied individuals. Older Americans have been increasingly participating in the workforce while younger Americans having been dropping out. Another strike against “progress towards maximum employment“.
On the inflation side of the fence, which Mr. Powell considers to be (paraphrasing) short term and temporary, there is some basis in thinking that the Consumer Price Index (CPI) number of 5.4% and 5.3% for the last three months, has parallels with the peak CPI number during the last great recession of 5.6% from July 2008. Yes, 5.6% then was primarily because of the “historic” (at that time) $100 billion government stimulus program rolled out during the spring of 2008.
But there are four big differences this time.
First, instead of a $100 million stimulus package, the federal government has put almost $5 TRILLION dollars into the pockets of consumers, $3.7 TRILLION of which has ended up as deposits in banks – to be spent at some future date. The inflationary consequences of such massive direct stimulus will be more long-lived than it was in 2008.
Secondly, the Producer Price Index (PPI) which the Bureau of Labor Statistics (BLS) first began tracking in 2011, reports how the prices companies that produce goods and services charge to their customers. As such, it is a leading indicator of future increases in the CPI. If producers are increasing prices to wholesalers and distributors today, the prices consumers pay tomorrow will also increase.
Thirdly, Mr. Powell recognizes that consumers are spending relatively more of their available stimulus funds on durable goods where pandemic-related, supply-chain shortages caused significant price increases. Mr. Powell makes the point that, by way of example, the price of used cars will “soon be pulling measured inflation down, as they did for much of the past decade”.
The latest CPI data indicates that the price of used cars and trucks rose 31.9% during the twelve months ending August 2021 but just during the three month period, April, May and June of this year, used car prices rose 27.8%.
On the other side of the car lot, new vehicle prices rose a more modest 7.6% during the same twelve month period but most of that increase (5.5% of the 7.6%) occurred in the three month period May through July of this year. This seems to indicate that the price of new vehicles will trend upward through the balance of the year but, yes, I agree with Mr. Powell that the price of used vehicles will begin to ease. Just not by all that much.
How people spend their money has been changing over time anyway. American consumers have been gradually spending more and more on durable goods over this last decade. The chart below shows how much out of every dollar consumers spend on the three main groupings of things they can spend money on: services (housing, health, etc.), durable goods (like cars), and non-durable goods (like toilet paper and food).
For the first decade of this century, the average consumer consistently spent 67 cents out of every dollar on services.
Between 2010 and 2020, even though the population grew by only 7.4%, overall consumer spending increased by 25.5% as the middle class expanded and the nation became more prosperous,. As a result, Americans began spending progressively more of every available dollar on durable goods and relatively less on buying services.
I concur with Mr. Powell that the government’s recent stimulus payments have accelerated how much consumers spend on durable goods, now up to 16 cents out of every dollar in July 2021, but the trend was already evident.
Parenthetically, let me add that it is worth highlighting that as consumers spend relatively more money on goods, primarily provided by big businesses, and less money on services, primarily provided by small businesses, small businesses will increasingly struggle while big businesses will continue to get bigger. This is already causing a fundamental shift in how America works.
Finally, Mr. Powell stated that “Today we see little evidence of wage increases that might threaten excessive inflation” which is definitely true. The challenge faced by the U.S. economy today is the opposite.
Wages aren’t keeping up with the CPI at all. Logically, as prices continue to rise faster than wages and salaries, wage earners will have less money to spend on good and services, period.
Wages are falling behind for workers. When you add into the mix a relatively large number of unemployed and under-employed Americans looking for the right opportunity, together with a significant number of individuals who simply dropped out of the workforce once the pandemic hit, consumers will collectively have relatively fewer dollars to spend on goods and services in the future than previously.
The knock-on effect from all this is that companies will sell fewer goods and services, with all the attendant implications that has for employment within those companies in the short to medium term.
Where this leaves the United States is here: although we’ve been through the deepest and (because of a huge amount of government stimulus) shortest recession ever, the underlying employment and inflationary fundamentals of the economy remain weak.
The government has succeeded in kicking the can down the road a little way, admittedly at the expense of at least the next two generations of Americans, but all it has really done is postpone part two of the 2020 recession.
The next phase will, unfortunately, be characterized by persistent and on-going inflation, a bigger welfare burden, less consumer spending, and, undoubtedly, higher taxes.
All of which will herald the gradual erosion of middle class America.
And I’m not sure that the monetary policy toolbox of the Board of Governors of the Federal Reserve Bank contains the necessary tools to help very much this time around.