Well, the media was quite surprised by last week’s very positive jobs report and now is scrambling to interpret what it means. For example, the New York Times concedes that “conventional wisdom” was too pessimistic about how much the economy could grow before setting off inflation. In hindsight, this was a “costly mistake,” the Times said.
It concludes that there are a lot of good things to say but also a few not so good things regarding the November employment numbers.
The 266,000 job-growth number is a “blockbuster” even after accounting for the one-time boost of about 41,000 striking GM workers who returned to the job,” the report said. Revisions to previous months’ job counts were positive. The unemployment rate fell to 3.5%, matching its lowest level since 1969.
The report also noted that the share of the adult population in the labor force ticked down and average hourly earnings “continued growing at only a moderate pace, up 3.1% over the last year. Still it said it “feels churlish” to focus on a weaker area “when the big-picture numbers are so good.”
However, the Times thinks it sees a “bigger lesson” contained in the data, one that is important beyond any one month’s tally of the job numbers — and that is that the US economy is “capable of cranking at a higher level” than conventional wisdom held as recently as a few years ago.
It now sees the economy as “continuing to grow well above what once seemed like its potential without inflation or other clear signs of overheating” and concludes that it’s “clearer” that the old view of its potential was an extremely costly mistake. The mainstream view held by the economics profession—including leaders of the Federal Reserve, the Congressional Budget Office, private forecasters and many in academia—was that the United States economy was at, or close to, full employment.”
Looking back, the NYT said that in January 2017, for example, nearly three years ago, the Congressional Budget Office forecast a 4.7% unemployment rate as far as the eye could see, and it projected that the United States labor force would consist of 163.3 million in 2019. The jobless rate has averaged less than 3.7% through the first 11 months of the year, and the labor force now stands at 164.4 million people.
The Federal Reserve likewise was too pessimistic about the potential of American workers; in projections three years ago, the consensus view of its leaders was that the unemployment rate would average 4.5% in the final months of 2019. “If that forecast had materialized, 1.6 million more Americans would currently be unemployed than actually are,” the Times said.
That view also expected that the target interest rate to be around 2.9%, reflecting rate increases they believed would be needed to head off inflation. Instead, that interest rate is around 1.6% —"and you have to squint to see signs of inflation,” the Times said.
If you go back even further, to the late Obama years, there was an even more pessimistic tone about the outlook for American workers embedded in the fine print of both public and private-sector forecasts. If we knew then what we know now, it would have had big implications for what seemed like sensible policy, the Times concluded.
Thus, the US probably didn’t need to reduce budget deficits the way it did between 2013 and 2016 — now that we know how much untapped growth potential there was. The Fed probably didn’t need to raise rates as quickly or as much as it did.
The Times also thinks that markets “seem to be getting that message.” For years, whenever there has been a strong jobs report like the one issued Friday, markets viewed it as hawkish for monetary policy — as tilting the balance toward more interest rate increases.
But this time, analysts and financial markets seemed to take the big-time job growth numbers in stride, given that they weren’t accompanied by any signs of ill effects from the low unemployment rate and strong growth.
Still, the Times urges caution. It notes that people still worry that this expansion, now in its 11th year, is growing long in the tooth or that we are late in the cycle. And maybe that’s right. But the biggest lesson when you contrast where the labor market stands at the end of 2019, versus where smart people thought it would stand just a few years ago, is that “there’s a lot we don’t know about just what is possible and how strong the United States economy can get.”
Well, that’s a mouthful for the Times — or anybody — and it likely means that the economy certainly will bear watching in today’s turbulent times. Inflation likely is a threat in the minds of many observers even if it has been slow to show itself. Global weakness and uncertainty in trade still must be factored in — very carefully.
But, good news is still good news even if it is complicated. Global market access still needs to be expanded even if that continues to be heavy, heavy lifting. These are trends producers should watch closely and carefully, as usual, Washington Insider believes.
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