I'm feeling a little bored so I'm going to do something foolish: make a prediction. In particular, I'm going to make a prediction about the economy.
As most of you know, my view of the economy has always been resolutely boring and conventional:
- In response to inflation, the Fed raises interest rates.
- A while later long-term interest rates go up.
- A while after that the economy slows and unemployment goes up.
In the current case, the Fed started raising rates in March 2022. Long-term rates hit a new peak around January 2023. If history is any guide, it takes about a year for the economy to respond to higher long-term rates, which means that things will start to slow down around December 2023. Here's a historical chart showing the way unemployment usually starts to rise about 12 months after long-term rates have climbed to a new peak:
There's nothing precise about this. Unemployment generally starts to go up about a year after long-term rates have hit a new peak, but not always. It might happen sooner. Sometimes there's no response at all.
Nevertheless, the increase in long-term rates has been fairly sharp and fairly large this time around, and I'd be pretty surprised if the economy didn't respond in a fairly conventional way. This may seem like a leap of faith based on invisible forces, but those forces are out there burrowing away whether you can see them or not. They're already baked into the cake, and the only real question left is the exact timing and size of the response, not whether there will be a response. Of course there will be.
The chart doesn't show any consistent association between interest rates and unemployment at all. For example, the spike in the former in 1994 had no appreciable effect on unemployment, and unemployment fell in almost a straight line post-GFC and pre-pandemic, despite interest rates jumping around frequently.
Interest rates influence employment indirectly via their impact on economic activity. It's likely the massive investments in public infrastructure under this administration are compensating for reduced investment in the private sector; for once governments aren't relying solely on monetary policy to steer the economy.
While Americans may shrug this off, it should be remembered that the 1994 interest rate hikes caused massive economic disasters is Mexico, South America and Asian economies.
It was an unmitigated financial/economic disaster for many mid size and smaller economies around the world.
Highlighting this episode of rate increases reinforces Kevins point that rate increases which are designed to slow the economy and cause unemployment/harm will usually cause the intended harm....although the timing and exact type of harm is hard to predict.
Its easy to imagine a similar scenario in the near future and it would be hard to predict the outcome for US unemployment if the Fed were to suddenly reverse course and start lowering rates in response to some foreign economic disaster amongst major US trade partners.
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Yeah, this has to be one of Kevin's weakest efforts yet. Somehow the ~1.5% increase from 2006-07 caused a massive increase in unemployment in 2008 (gee, did something else happen around then?), but a 2% increase in 2013-14 caused unemployment to drop. Same thing with 1994-95. There is no correlation to be found here.
I look at that chart and think that the economy is structurally different now than it was in previous instances. I don't think long term interest rates and unemployment are related at this point - if they ever were. I'm becoming rather skeptical of the gospel that the Fed's interest rate policy has much of an effect on unemployment rate.
You may have a point...going backwards, unemployment jumped when...
Covid
Banking crises
Junior (and 9/11 and fallout)
Senior (and Berlin Wall falls)
And chart started in Reagan years with things still crazy from oil shocks, etc.
I think there´might be something to your observation but I think the real issue is that the Fed feels like it wants or needs to create a recession. And that I think it does indeed have the power to do.
Just like there was a series of (unfortunate) events that kept inflation around longer than team transitory would like, there's a series of (fortunate?) events that keeping employment low. The Fed raise rates to suck money out of the economy to kill inflation and raise unemployment. The Chips Act, infrastructure bill, Ukraine war, are all dumping money back into the economy. And the Biden administration has been pushing the money out fast--before Congress claws it back.
This is where I agree completely with Kevin.
I've accused Powell of intentionally overshooting to harm Biden's chances here a few times. That's intentional hyperbole - the motivations and pressures involved are complex.
But the current rosy outlook going around right now looks misguided to me.
I think kenalovell is right that this chart doesn't show much actual correlation-- what correlation there is seems backward-derived and frankly a little dubious. To me what this chart really shows is a 36-year secular pogo-stick-bounce decline in rates, with unemployment peaks at random points, likely for largely unrelated or maybe semi-related reasons.
One thing I haven't seen talked about, looking ahead on the politics, is the tons of spending due next building season from both infrastructure act and inflation reduction act appropriations. Unless I don't understand how these things work, next summer should see heavy spending from both sources, because BIA projects are big and long-term, and IRA spending is just being planned at state and local levels now, so the actual work will happen next year. Seems to me this pattern is likely to have some effect on employment and possibly on mood, particularly if supply-chain issues have largely resolved and inflation has slowed (as Kevin has argued in both cases).
Re: Building
From Bill McBride: https://www.calculatedriskblog.com/2023/07/june-housing-starts-record-number-of.html
There is zero chance I will be laid off in the next two years so no recession for me. Anyone else here afraid they will lose their job?
The employment situation is very different now
There are far fewer workers than there were at any time in the last 60 years.
Could unemployment rise? Certainly but not to the extent of previous bumps.
Then there's the wealth that boomers have built up that will be tapped into during any upcoming "recessions".
Things have changed. We are in uncharted waters here KD
Dream act and increased immigration could help....oh wait....
golack
Yes they could help but they won't
Sure you would be able to fill some unskilled labor job openings and some construction openings but many of the job openings we have are just not suited for people from outside the U.S.
The problem here is the boomers. They are still alive and demanding of goods and services. If you take THEM out of the equation then, yeah, I could see a rougher landing.
But right now? I dunno.
What I see right now is a soft landing OR no landing at all employment wise.
As said above, we are looking at large infusions of public money over the next few years, counterbalancing some of the disinvestment from the private sector, and the boomer retirements are going to pick up.
Honestly some of the private sector investment (crypto, tech bros) driven by low interest rates needed to be sucked dry because it was concentrating talent into unproductive economic activity.
Good point about the effects of yield-chasing in the low-rate environment. It was helped, imho, by media need to locate glamour ("personalities" and "interesting angles") when there wasn't a whole lot else going on in the new-opportunities department.
Attempting to correlate two data points among dozens used by economists, is probably unwise.
I give Kevin a hard time on this topic, but I applaud him for making a specific prediction: "things will start to slow down around December 2023."
Of course, I can't but notice the moving of the goal posts. It used to be that rising Fed Fund rates took a year to impact the economy, but now it's a year after *long term* rates *hit their peak* before the slowdown starts.
Keep this up, and we'll boil down to what Kevin's really saying: Someday there will be a recession.
I agree with him on that!
Lastly, since Kevin was bold enough to make a specific prediction, I wonder if he cares to address his recent predictions of recession which have turned out to be wrong:
Recession coming in first half of 2023: https://jabberwocking.com/two-recessions-are-barreling-toward-us-next-year/
Recession coming a few months from January 31, 2023: https://jabberwocking.com/a-recession-is-coming-our-way/
Why were you wrong then but right now, Kevin?
In the current case, the Fed started raising rates in March 2022.
Yes, and the economy has been slowing. I'd be more worried if that hadn't been the case, because I'd be wondering when the other shoe will drop. But it's already dropped!
*2021 saw torrid growth: 5.9% as the economy snapped back from Covid.
*2022—as the Fed started tightening—saw growth decline fairly dramatically, to 2.1%.
*2022Q1 saw US GDP growth drop to an annualized rate of 2.0%, and most of the forecasts call for growth to drop toward 1.0% in 2023 and staying subdued (under 2%) in 2024.
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