Yesterday the US Bureau of Labor Statistics reported a gain of 528,000 jobs and an official unemployment rate of 3.5%. This against two consecutive quarters of declining real GDP. How to square the circle?
Longtime readers have heard the basis for it before. So-called “real” GDP is calculated by starting with nominal GDP and backing out inflation. Logical, right? But the accuracy of the derived statistic depends on getting both inputs right. And as we have pointed out ad nauseum, the economics community doesn’t get inflation right. It’s reckoning of “inflation” is based on one narrow subset of prices – US domestic consumer prices – and this subset is a lagging indicator. So as inflation rises, it systematically understates inflation, with the result that inflation is not fully backed out of nominal GDP. That in turn leads to GDP being overstated. This is the genesis of the myth that easy money stimulates the economy. Through this distorted lens, rising inflation looks like real growth.
The opposite happens on the way down. The use of an overstated inflation figure results in real GDP being understated. The tightening of financial conditions due to the collapse in bond prices over the first half of the year has brought inflation down, but it has yet to be fully reflected in lagging consumer prices.
With this insight, we can settle the question … between these two sharply dissonant statistics, on one hand collapsing real GDP versus on the other soaring employment, which one is wrong?
Collapsing GDP. We have not had two quarters of declining real GDP.
So if we have not had two quarters of declining GDP, then everything’s hunky dory, right? Alas, no. The increase in jobs isn’t because more people are working. It’s because people are working more jobs. This is revealed by the less ballyhooed household survey, which shows the number of people working to have held roughly steady since March, even as the number of jobs has soared. People who had one job took a second, people with two jobs took a third … this economy is anything but a model of prosperity. The latter would be exactly the opposite … having to work less for a better standard of living. Instead what we have is people having to work more just to make ends meet.
Policy implications? Some are spooked by the prospect that monetary tightening will spur a “recession”, if it has not done so already. We’ve discussed at length before the lack of utility of “recession” as an economic variable, and have had no sudden change of mind on the question, but if this is “growth”, perhaps less of it is exactly what we need. If you’re going down the highway at 120 mph, moving to a mere 80 mph is incontrovertibly a slow down, but whether it’s a “bad thing” to be avoided isn’t science, it’s a value judgment.
Do the two statistics have to be dissonant? Perhaps the two statistics are just painting a picture for us of declining productivity. That is the interpretation that makes the most sense to me.
Fair point, kbird … and by themselves that would be a logical interpretation. The household survey raises a different issue. That the number of jobs has far outpaced the number of people working makes it clear that the number of jobs per worker has risen.
But more fundamentally, we have to wonder, if consumer price inflation is a lagging indicator, how that would affect real GDP data. Wouldn’t a lagged inflation adjustment add to “real GDP” on the way up and subtract from it on the way down? In which case you would expect otherwise inexplicable surges and declines in implied “productivity”. And still would be in need of some justification for the otherwise inexplicable assumption that depreciation of the currency only affects US domestic consumer prices, leaving other prices like those of assets miraculously untouched.
Bottom line is either inflation only affects some prices or it affects all prices, just not at the same time. I’ve never seen even an attempt to reason in favor of the former; it’s just assumed.
another contribution to reconciling the household with the enterprise employment changes are people who were gig workers, “consultants,” independed contractors getting on a payroll
Sure, and it probably is, but people can just as easily go from being on a payroll to being independent contractors, gig workers, etcetera as the other way around. What macro force might cause movement in latter direction to so overwhelm movement in the former?
Meanwhile my hypothesis has a notably plausible underlying cause … inflation is causing large numbers of people to take on second and third jobs in order to make ends meet. I know some of them.
The gap is massive: