The U.S. economy has never had a soft landing, but one could be on the way soon. If so, it will probably be because a surge in immigration provides a big, soft pillow for the economy to land on.
(Note: I am not going to get into the question of whether this immigration is good in an overall sense, just the macroeconomic impact.)
Some of the recent economic data has been some of the strangest I’ve ever seen.
NGDP grew at a 5.2% annual rate in the second quarter and 5.8% over the 12 months
RGDP grew 2.8% annually in the second quarter and 3.1% over the 12 months
Yet according to the household survey, less than 200,000 net new jobs have been created in the past 12 months. This doesn’t make sense. Real GDP data shows we’re in a great economic boom, yet the household employment survey suggests we’ve just narrowly avoided a recession. What on earth is going on?
The answer appears to be immigration. Household surveys have not recorded a surge in immigrants, many of whom are illegal. But the government’s payroll survey of employment records immigration, which has led to a very large net gain of 2.6 million new jobs (1.67%) over the past 12 months. This data is roughly in line with what would be expected from 3.1% growth in RGDP.
Payroll surveys have always been considered more accurate than household surveys when it comes to short-term employment changes, but I can’t recall ever seeing such a large discrepancy, and it coincides with a historically large immigration surge.
yesterday, Bill Dudley In a Bloomberg article, he suggested that the Fed needs to cut interest rates now. Here are some of his arguments:
Slower growth means fewer jobs: Employment increased by just 195,000 over the past 12 months, according to the Household Employment Survey. The ratio of unfilled job openings to unemployed people is back to pre-pandemic levels, at 1.2.
Most worryingly, the three-month average unemployment rate is up 0.43 percentage points from its lowest point in the past 12 months, which is very close to the 0.5 threshold that always signals a U.S. recession, as identified by the Samrule.
As I suggested, I think the household figures are simply wrong. But I am a big fan of Sam’s Rules and actually once A cruder version We’ve touched on this idea in previous blog posts. However, in most cases, rising unemployment is caused by a fall in the demand for labor. In this case, a large increase in labor supply seems to explain the rise in unemployment (which is still low in absolute terms). That said, I would be concerned if the unemployment rate rose to 4.5%.
I do not intend to take a position on where the Fed should set interest rates. However, I do not believe that the Fed needs to ease monetary policy because NGDP growth is still excessive, even when labor force growth is taken into account. Therefore, monetary policy is not currently overly tight, at least based on recent macro data and the implicit forecasts of various asset markets (especially equities).
Please don’t take this as me saying I’m against lowering interest rates: it’s likely, but not certain, that interest rates will be lowered over the next 12 months. Stance of monetary policy It’s about neutral. Again, interest rates are not monetary policy.
When the Fed tries to tackle inflation during times of low unemployment, it usually leads to a recession. everytime It will cause a recession within the next few years, and if that doesn’t happen this time, it will be the first soft landing.
(Note: The media often uses the term “soft landing” to describe a period of rising and then falling interest rates without a recession, such as the mid-1990s. I Periodically low Unemployment without rising inflation. At least three years. Perhaps that would be the case without the COVID pandemic, but we’ve never seen it before. We’re about nine months away from when I declare this America’s first soft landing. (Can Trump and Harris get the credit?)
If such an outcome (which is not that unusual in other countries) was indeed obtained, one must consider how it happened. In my view, it was a combination of luck and skill. The skill is the Fed’s ability to slow NGDP growth at a steady rate without going too far in either direction. In retrospect, monetary tightening should have been obvious in 2022 and 2023, when labor shortages were prominent. But it is hard to be too critical when inflation appears to be moving in the right direction (but too late). On the other hand, I am very critical of the Fed’s highly inflationary policies in 2021-2022.
The lucky thing is the immigration surge. Consider the 5.8% NGDP growth rate over the past year. Before COVID, the Fed estimated the economy’s trend growth rate at 1.8%. Thus, 5.8% NGDP growth rate is expected to produce inflation of about 4%. If inflation remained that high, the Fed would be pressured to slam on the brakes and risk a recession. However, 12-month PCE inflation has fallen to 2.6%, driven mainly by the rapid growth in RGDP due to the surge in employment. With inflation approaching its 2% target, the Fed believes it can afford to be patient.
I would advise caution against pundits who warn that money is too tight. Inflation and NGDP growth are both still excessive. Anecdotes about this or that sector of the economy don’t tell the whole story. The overall economy is still doing well and markets are optimistic. I don’t see any compelling evidence that money is too tight.
P.S.: Also be skeptical of anyone who says “inflation is only X if you adjust for Y.” NGDP confirms that underlying inflation is still too high. Cherry pickers only throw out misleading data points that help their case, and are unwilling to throw out misleading data points that hurt their case.
