July’s jobs data came in better than expected, and stock sold off. From the markets’ perspective, if a company performs better than expected, it’s good news, but if the economy as a whole does, it’s bad news. Fallacy of composition.
The financial press has a logical explanation: stronger jobs data imply the Federal Reserve will have to raise interest rates even more, making a recession more likely.
I think this gets the logic backwards. If you are worried about a recession, the latest data are very good news. The economy added over half a million jobs in July, and June data were revised upwards, raising the 3-month moving average to about 440k.
The unemployment rate is at 50-year low. Job openings came down a bit in June but remain extremely high, supporting the continued uptrend in hirings.
Across the economy, employers kept hiring even though interest rates have risen , and even though media headlines keep warning we are — or soon will be — in recession.
The Fed had already indicated it will keep raising rates through the end of this year and into the next. A stronger economy has a much better chance of withstanding higher interest rates while the Fed assesses what happens to inflation as exogenous shocks on energy and other commodities fade out (hopefully).
Maybe markets are worried the Fed will tighten too much. The latest data showed wage growth still runs above 5%, so high inflation is not just driven by supply shocks — and the Fed has said it will need to cool the labor market to bring inflation under control. But surely a stronger economy can also hold up better against tougher monetary tightening.
Look at it the other way around: if the labor market were already crumbling, with interest rates still very low in absolute terms (and very negative in real terms, given that inflation is running at 9%), we should be much more worried that a recession is imminent.
A more likely explanation is that markets are worried about higher interest rates per se, not about a recession. Worried we might see the end of this comfortable era of ample liquidity and extremely low interest rates.
But that era was never sustainable. It was certainly not compatible with robust economic growth and rising living standards — at best with a dismal depressing “secular stagnation” scenario. We should be happy to leave it behind.
The next step should be to stop obsessing about demand stimulus and refocus on the supply side of the economy. One disappointing element of the July jobs report was the stagnation in the labor force participation rate. For stronger long term growth we will need to pull more people back into the labor market and to support continued investment and innovation. You know, the kind of factors that allow an economy to grow even without negative interest rates and quantitative easing…
[This story was first published here: https://www.annunziatadesai.com/blog, where you can find more of my blogs and subscribe to the mailing list]