Donald Trump provides no shortage of grounds for criticism, but the NYT is really grasping at straws in it editorial headlined, “clouds darken Trump’s sunny economic view.” The confusion that characterizes the piece starts in the first paragraph when it tells us “the stock market seemed unimpressed” by the 157,000 jobs reported for July.
This is bizarre for two reasons. First, a major complaint of the piece is that workers are not getting their share of productivity gains, instead, it is going to profits. While this is true (although the revised data do show a substantial shift from profits to wages in the last three years), the story of stagnant wages and rising profits should lead to a higher stock market, other things equal.
If shareholders believe that Trump policies will shift income from wages to profits, this would be a reason for the market to rise. If we are supposed to be impressed by the market’s decline then this could mean shareholders are worried about future profits. This is again a case where it is worth pointing out that the stock market is not the economy.
The other point is that monthly jobs data are erratic. It is common for bad months to be followed by good months and vice versa. This is why economists typically focus on job growth over several months, as opposed to a single month.
We created 268,000 jobs in May and 248,000 jobs in June. Both numbers were revised upward with the July data. This gives us an average of 224,000 new jobs over the last three months. That is a pretty damn good story by any measure.
The piece also warns us that people are running out of money to spend. While many people certainly are pressed, the big news in the second quarter GDP data released last month was a sharp upward revision to the savings rate. The revised data show the savings rate to be close to its average for the last two decades, rather than being extraordinarily low, as was the case with the unrevised data. Furthermore, the Federal Reserve’s data on debt service burdens shows them to be at relatively low levels. Consumers are not about to run out of money to spend.
And of course, we get the curse of an inverted yield curve, with short-term rates rising above long-term rates. According to the curse, this gives us a recession.
Rather than there being some mysterious force that causes a recession from an inverted yield curve, there is a more simple explanation. All but two of the post-World War II recessions were caused by the Fed raising interest rates to try to slow the economy, presumably to head off inflation. (The two exceptions were the crash of the stock bubble in 2001 and the crash of the housing bubble in 2008.) The recession comes because the Fed goes too far.
We tend to get an inverted yield curve because long rates never rise one to one with short rates so any sharp rise in short rates will eventually lead to an inverted yield curve. In the current environment, since long rates have been at extraordinarily low levels, it is not hard for the Fed to raise short rates enough to lead to an inverted curve. What does the inversion mean for the economy? Pretty much nothing in my view.
Anyhow, it’s best to keep our eyes on the ball and focus on the many bad policies that Trump is actually putting in place. Many will hurt the economy, but much more in the long-run than the short-run. And, we should not be rooting for a recession to somehow save us from Trump’s incompetence and evil.