The US economy has never had a soft landing. We may be about to have it. If so, it may be because the increase in immigration has provided a big soft cushion for the economy to move forward.
[Note: I will not address the question of whether this immigration is good in any overall sense, just the impact on the macroeconomy.]Some recent economic data is about as weird as I’ve ever seen:
Q2 NGDP rose 5.2% annual rate, 5.8% in 12 months
Q2 RGDP rose 2.8% annual rate, 3.1% in 12 months
Yet local research suggests fewer than 200,000 new jobs have been created in the past 12 months. That makes no sense. Real GDP data says we’re well on our way, and the employment household survey suggests we’re far from out of recession. What gives?
The answer seems to be immigration. A household survey finds no increase in the number of immigrants, many of whom are undocumented. But the government’s labor force survey shows an increase in immigrants, and shows a significant increase of 2.6 million (1.67%) in net new jobs over the past 12 months. That data is about what you would expect with 3.1% RGDP growth.
The payroll survey has always been considered more accurate than the household survey of temporary changes in employment, but I don’t recall seeing such a big difference. This difference is consistent with the increase in immigration historically.
yesterday, Bill Dudley had a Bloomberg piece suggesting “Fed Needs to Cut Rates Now”. Here are a few of his arguments:
Slower growth means fewer jobs. The household employment survey shows that only 195,000 were added in the last 12 months. The ratio of unfilled jobs to unemployed workers, at 1.2, is back where it was before the pandemic.
Worryingly, the three-month unemployment rate rose 0.43 percent from its lowest point in the past 12 months – very close to the 0.5 threshold, as indicated by Sahm’s Law, which always indicates a slowdown in the US economy.
As I suggested, I think the home math is wrong. I’m a big fan of Sahm’s Rule, though, and once developed a the cruder version of this idea in an old blog post. But in most cases, the increase in unemployment is caused by a decrease in the demand for workers. In this case, the large increase in the number of workers seems to explain the increase in unemployment (at a rate that is still low in absolute terms.) However, I would be concerned if unemployment rose to 4.5%.
I do not offer opinions on when the Fed should set interest rates. But I see no need for the Fed to ease monetary policy, as NGDP growth is still strong, even accounting for labor force growth. So monetary policy is not very tight at the moment, at least based on the latest big data and forecasts in various asset markets (especially stocks.)
Please do not take this as a statement that I am against lowering interest rates. It’s possible (but not certain) that interest rates will have to come down sometime in the next 12 months, if only to save money. monetary policy stance almost neutral. Also, interest rates are not monetary policy.
A Fed anti-inflation program during a period of low unemployment usually produces a recession. Rarely, it always it produces a recession within a few years. If it doesn’t happen this time, it will be our first soft landing.
[Note: The media often applies the term “soft landing” to something like the mid-1990s, a period of rising and then falling interest rates with no recession. I am using the term for a sustained period of cyclically low unemployment without rising inflation. Say at least three years. We’ve never had that, although without Covid we probably would have. We are about 9 months away from me declaring this to be America’s first soft landing. (Will Trump or Harris be able to take credit?)]If we achieve this kind of result (which is common in some countries), we need to consider how it happened. In my opinion, it could be due to a combination of luck and skill. The ability would be the Fed’s ability to reduce NGDP growth at a steady rate, without being shot in any direction. In retrospect, it is clear that money should have strengthened in 2022 and 2023, as there was a labor shortage. But it’s hard to criticize too much when it seems that inflation is moving in the right direction, albeit very slowly. On the other hand, I am very critical of the Fed’s inflation policy for 2021-22.
Part of the luck is the increase in immigration. Consider NGDP growth of 5.8% over the past year. Before Covid, the Fed estimated the economic growth rate at 1.8%. So you can expect NGDP growth of 5.8% to deliver around 4% inflation. If inflation were to remain that high, the Fed would be under pressure to hike, risking a recession. Instead, 12-month PCE inflation fell to 2.6%, mainly due to faster RGDP growth, driven by increased employment. As inflation approaches the 2% target, the Fed believes it can be more patient.
I would encourage people to be wary of experts who warn that money is tight. Both inflation and NGDP growth remain high. Anecdotes about this or that sector of the economy don’t tell the whole story—the economy as a whole is still booming and markets are optimistic. I don’t see any concrete evidence that money is tight.
PS. Also don’t be suspicious of people who say “Inflation will be X only to be adjusted for Y”. NGDP confirms that underlying inflation is still very high. Cherry pickers want to discard only misleading data points that help their argument, not misleading data points that hurt their argument.
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