The May Unemployment Report Was Bad News for Democrats
On Friday, June 1, the Bureau of Labor Statistics (BLS) reported that in May 2018, America’s “headline” (U-3) unemployment rate fell to 3.75%—the lowest number seen since December, 1969 (3.53%).
The May jobs report, along with several other important economic indicators, suggests that, by November 6, Democrats running for Congress may well find themselves in the middle of a “perfect storm” comprising rapid real GDP (RGDP) growth, low inflation, rising wages, and a tight labor market. If so, the House and Senate Democrats’ unanimous opposition to President Trump’s tax cuts will make them extremely vulnerable to Republicans running on a “pro-growth” message.
Friday’s BLS report described a labor market that, while certainly “better,” was far from “great.” Adjusted to the labor force participation (LFP) rate of April 2000, May’s unemployment rate was 10.3%, far above the officially reported 3.8%. If anyone is wondering why wages are not yet rising rapidly, here is a clue.
The big (but largely hidden) story of the past 18 years has been the disastrous decline in LFP. Under Bush 43 and Obama, overall LFP fell by 4.3 percentage points, which is equivalent to 11.1 million working-age Americans giving up on work. This wasn’t just a result of Baby Boomers retiring. LFP in the core 25 – 54 age group fell by 2.5 percentage points over those 16 years. The LFP decline has made the jobs market appear to be much tighter than it actually is.
Trump’s policies have arrested the LFP decline. During Trump’s first 17 months, overall LFP has been unchanged, while the LFP for Americans aged 25 to 54 has increased by 0.4 percentage points. Further recovery in LFP will require not only rapid RGDP growth, but also reining in welfare state programs (e.g., student loans, food stamps, Medicaid, SSI disability) that make it easier for able-bodied adults to live without working.
Job growth has also improved under Trump. The number of FTE jobs has risen by an average of 213,000 per month, compared with 93,000 per month for Obama’s entire presidency and 177,000 per month during his final 17 months in office.
But wait—there’s more!
On June 1, the Federal Reserve Bank of Atlanta’s “nowcast” of 2Q2018 real GDP (RGDP) growth ticked up to 4.8%. Expansion at this rate during 2Q2018 would bring trailing 12-month RGDP growth up to 3.27%. The comparable number for Obama’s final calendar quarter in office was only 1.84%.
Now, 3.27% RGDP growth isn’t “great.” It isn’t even “normal.” Despite the Great Depression, America’s RGDP growth averaged 3.50% during the 20th century. It is, however, far beyond what progressive economists have been telling us is possible in this age of “secular stagnation.”
“Secular stagnation” amounts to a “protected class” of “experts” telling an unprotected majority that they must live with a “new normal” of sub-2.00% RGDP growth, along with feeble returns on retirement assets and low-paying jobs for debt-burdened college graduates.
Progressive economists (led by Larry Summers with his speech in November 2013) are saying that the economy can’t grow fast because the labor force is growing slowly and technology isn’t advancing. (They are also saying that AI robots will put us all out of work, but never mind.)
Secular stagnation was nonsense when it was first advanced by economist Alvin Hanson in 1937, and it is nonsense today. There are no limits to economic growth other than bad government policies.
Last year, in Issue 375 of the Chicago Fed Letter, the Federal Reserve published a graph that showed that the economics profession’s forecast of long-term economic growth simply follows observed growth with a lag. In 2000, the consensus of “Blue Chip” economists was for 3.50% growth. By 2017, the Blue Chippers were down to 2.00%, and the Federal Open Market Committee (FOMC) was predicting 1.70%. In other words, economists are basically useless.
Of course, valid or not, the “secular stagnation” theory serves progressive ends. Slow growth creates support for a bigger, more powerful government (run by progressives, of course), to ease the social pain caused by slow growth. Pay no attention to the fact that progressive, big-government policies are the cause of slow economic growth in the first place.
At sustained 1.00% RGDP growth, the Republican Party would wither away. At sustained 4.00% growth, the Democratic Party would wither away. This is why, as they look ahead to November 6, the Democrats should be very afraid of the gathering Trump perfect (economic) storm.
But wait! What about the “Phillips Curve?” Won’t fast growth and low unemployment lead to inflation? And won’t the Federal Reserve have to raise interest rates to prevent the economy from “overheating?”
The FOMC seems to truly believe in the Phillips Curve theory, which posits that there is a tradeoff between inflation and unemployment, and that the Fed must engage in economic central planning to manage this tradeoff.
For some time now, the U-3 unemployment rate has been below the Fed’s estimate of “the natural rate of unemployment,” which is the level below which inflation will (supposedly) start to rise. The expected inflation hasn’t shown up (the Fed has consistently missed its 2.0% inflation target for 5 years running), but the FOMC has been slowly raising its Fed Funds interest rate target to head inflation off at the pass.
Like “secular stagnation,” the Phillips Curve is utter nonsense. Fortunately for America (and the world), however, the FOMC’s belief that the Fed Funds rate matters is also nonsense.
“The dollar” is our unit of market value. Inflation involves a fall in the real value of the dollar. Obviously, nothing in the real world can impact the magnitude of a unit of measure. If low unemployment could cause inflation, it could also cause the foot to shrink, or the second to get longer.
Memo to the FOMC: the “natural rate of unemployment” is zero. There is no physical reason that everyone that wants a job should not have one. Stop treating prosperity as a disease.
Now, the FOMC is not likely to listen to me, so they will probably “raise interest rates” once or twice more before the election. Will this derail the Trump perfect storm heading toward the Democrats in November? No.
It doesn’t matter whether the Fed Funds rate is 1.75% (the current target), or 2.00%, or even 3.00%. During Clinton’s second term, RGDP grew at 4.43%, while the Fed Funds rate averaged 5.50%.
What matters to the economy is the real value of the dollar, and history has shown that there is no relationship between the Fed Funds rate and the real value of the dollar.
At the end of November 2015, when the Fed Funds target was 0.25%, the CRB Index** (a broad commodity price index) stood at 182.54. At the end of May 2018, after six Fed Funds rate hikes, the Fed Funds target was 1.75% and the CRB Index stood at 202.84. In other words, the FOMC increased its Fed Funds target by 600% to “fight inflation,” and the real value of the dollar declined by 10%.
If the CRB Index stays where it is now or rises moderately, RGDP growth, driven by Trump’s tax cuts and deregulation efforts, will continue to accelerate. Don’t forget that, in 1983 – 1984, when we simultaneously enjoyed big supply-side tax cuts, a deregulation push, and a slowly rising CRB Index, RGDP growth averaged 5.94%.
Here is the bottom line. If you are a Democrat running for Congress in November, the Fed is not going to save you from Trump’s perfect (economic) storm. If you are a Republican, run on economic growth.