Of all the things we look at when we try to gauge the state of the economy, nothing is more important than employment numbers. This is where the rubber meets the road.
With all of the focus lately on the trade war, Friday’s jobs report served to erase at least some of these concerns, and not without good reason.
We not only beat the expectation of the street by 100,000 jobs, the results of the prior two months became revised up by 41,000. That’s a lot more jobs than expected, but more importantly, this sends the message that the economy is doing fabulously in spite of all the worry.
We worry about the trade war with China quite a bit, and worry that this skirmish has already taken its toll, but if that were really the case, we’d see employment shrink, not expand. This is where we keep score for real, with everything else being influencers. If we are worried about tariffs causing damage to our economy, we can see clearly from these numbers that we instead are continuing to move ahead.
Jobs are created by economic expansion, and are lost due to economic contraction, so if you want to see what the net effect is with this, you look at the net numbers with jobs. We just got a big thumbs up for expansion.
We still are hearing a lot of talk about a recession coming in the next year or two, and it is economic data that is fueling these beliefs, even though they are not looking at the right data. It is not that the other data isn’t positive, even though only mildly so, but the employment data now screams strength from the rafters.
For those who may have been wondering whether GDP a little under 2% could still provide enough growth, we have our answer right here. In the absence of substantial negative influences, of a greater magnitude than the trade war has been thus far, an economy can do just fine and even great with this level of GDP growth.
How we get recessions is when a lot of people start losing their jobs, as an effect of a loss of production, which in turn reduces spending and this will reduce production even further. We can tinker with money supply to fight the flames of this, but the fact that it is going on at all is the issue, because this is how we measure prosperity for the most part.
The pain that people remember from the housing market crash comes from losing their job, not the fact that GDP went a couple of percentage points below the water for a time. We might think of prosperity in terms of the stock market, but the majority of people judge this by factors related to employment.
High unemployment is the trademark effect of hard economic times, and this was the case during our most recent crisis as well. The entire Great Depression was defined by it, and a lot of those years saw very high GDP growth, but we still call these periods part of the Depression because the job market remained very depressed.
For GDP growth to dip below the water again, this will take a significant change in the road that we are now on, as there is nothing out there in our present numbers for this to change enough to put enough downward pressure on it to move it away from us enough to be very concerned.
Although we’ve moved away from the idea of a recession next year, a high percentage of people believe that a recession will occur in 2021, and this is supposed to be based upon current data and trends. As it turns out, this may end up coming true, but not based upon economic trends but political ones, and this monster is not hiding under the bed but is out in the open and showing us its very sharp teeth.
This Latest Report Distances Us from Future Trouble
We are setting a nice table now though, which if the worst does happen, we have more stability to weather the storm than if things were not so solid. We are actually at the point where growth is limited by a lack of supply in the labor market, with the current unemployment rate of 3.5% being beneath the normal transition rate that we see with what we define as full employment. At this stage, adding more net jobs becomes more difficult due to a lack of people to fill them.
We still can end up expanding the labor market in terms of price, where this forces employers to pay more competitive wages as they compete with each other more. New jobs will still be added even though these new jobs may replace existing ones that are less competitive, and this describes our current situation to a considerable degree in the United States, which is sustained by our limiting the normal expansion that we would see if immigration controls were not in place.
While expanding the labor force can help fuel further GDP growth, doing this beyond demand levels serves to lower the average wage and the average standard of living in turn, which becomes even more problematic during down cycles in the economy and the labor market. This is why we put caps on immigration, and this is also a big reason why the U.K. wants out of the EU so that they can manage this better.
We do need to remember that big companies are not so confined and we farm out a lot of work and take advantage of lower labor costs in other countries, allowing our companies to quench their appetite for expansion in a way that can be superior to if we flooded our own labor market to accommodate this need for expansion, without subjecting our own economy to the dilution and risk of overcapacity that too much domestic expansion would involve.
The undocumented labor market also plays an important role in this, where the lowest paying and least desirable jobs that need to remain in the country can be filled, at a price point lower than what could otherwise be achievable. While we need to be careful not to overdo this by displacing too many domestic workers, seeing the official unemployment level so low tells us that we’re doing a great job with this and this undocumented employment currently adds and does not take away from the average level of economic prosperity of domestic workers overall.
Our current situation with the labor market is a fine one indeed all around and this may very well be the best position that we’ve ever been in when you look at the whole picture. The further up the scale we are, and today’s conditions are clearly 10 out of 10, the more capacity we have to undergo setbacks, and the way we’ve handled this tariff war thus far is testimony to that, even though the effects of this has generally been overstated.
This does tell us that we have some excess potential though, where events that would normally cause a shrinkage in the labor market can be offset by the current tendency toward growth.
With the recent cuts in the Fed rate at work seeking to keep money supply up this going on provides more fuel for the labor market to keep growing even though we are approaching its theoretical limit. When the gas pedal is fully depressed though, this is as far as you can get from slowing down, and Friday’s report tells us that our foot is definitely firmly placed on the accelerator now.
We are indeed at a point where we could say with considerable confidence that we are controlling organic shrinkage quite well, although we are still very much exposed to potential changes in policy that may not be so easy to manage. The tax hikes that are in the conversation are particularly concerning, and as good as things are right now, our success is quite tenuous as this is not a situation where we have too much growth, of a sort that the Fed would want to constrain, as this isn’t too much or too little but just right.
Higher Taxes Will Undo This and Much More
Constricting forces such as significantly higher taxes are therefore going to present some real challenges, and if we get anything like what is being talked about, if any Democrat wins the presidential election, including the more moderate Biden, this could easily turn the tide and knock us down into recession territory.
The biggest concern here is that this one would be more sustained given that it is caused by changes in policy that would persist for 4 years at least, especially since the level of transparency among the public is lacking. People don’t get how important tax cuts have been to our current success, and they also likely won’t understand how tax hikes and the resulting economic pain are related, perhaps blaming it on something else and maybe even wanting more of it to see us smack the rich around and not realize how much they are getting smacked around as well.
You can only do so much to stimulate borrowing and money supply with rate cuts or quantitative easing, and when what you are doing is barely enough, and there’s so much more that needs to be done, this can take us to a place where we are helpless to prevent a recession. If those who have caused it are not held responsible, they may continue to act with at least partial immunity and continue to preside over knocking not only the wealthy down a size or two but all of us as well.
That’s a considerable way off although you can bet that the stock market is pricing this in to some degree already, although there is a lot of room for this to grow as the risk becomes better defined. This one will be less of a surprise than the last one, where people knew of the housing crisis but didn’t appreciate the risk until the very end when we were on the brink of collapse.
Most of the risk of contractionary fiscal policy changes is beyond what is realistic, like the proposed wealth taxes, but there will be enough to do quite a bit of economic damage, and the fact that so many do not realize the risk and welcome these ideas with open arms is the real problem, and not one that will be going away anytime soon.
In the meantime, the stock market is moving happily forward after Friday’s jobs report, and are too preoccupied by the trade situation to pay too much heed to 2021-24, even though the odds of hitting a wall and being pushed back are pretty high right now.
If the Russians did play a meaningful role in the last presidential election, those of us who value prosperity owe them some gratitude, but even the Russians may not be enough this time and it’s difficult to imagine Trump being re-elected at this point. It is not too soon to start thinking about this, although we do want to make sure that we do not act in haste and get out while things are still moving forward with the stock market continuing to go up.
The jobs numbers may be the last to go, but you can bet that a lot more tax is going to put a bullseye on them and we will see unemployment climb as the stifling effects of these taxes do their dirty work. We will sell off more than we should, as we always do, but this will not be a time that we want to be sitting back and watching the value of our portfolios take more and more of a pounding as we wonder what to do.
Our best bet may actually be seeing Trump go up against Warren, who he is less behind overall than with Biden. Both Trump and Warren are polarizing, but Trump is actually the more mainstream of the two and it appears less likely that Warren can bite into more moderate voters than someone like Biden, who would win against Trump pretty easily right now, even though that might change. If Trump loses, the economy loses, and we underestimate the extent of the loss that we will have to bear, although we will come to know that soon enough if that is the path we choose to go down.
This is the real risk out there, not the lower levels of growth or the trade war or anything else, and while the jobs numbers look fabulous right now, a real storm is brewing which we cannot afford to ignore and one that no jobs report can do much about, no matter how good. Anyone who thinks higher corporate taxes somehow benefit the public will be in for a nasty surprise if this all pans out and they get raised by a lot, and the labor market is where they will feel the pain, in stark contrast to Friday’s stellar results.
We have set the bar though and there’s only one place to go from here, down, and we are left hoping that should the widely hated but reasonably effective Trump lose, we will at least learn more how higher taxes hurt everyone, and in the end, cost a lot of people their jobs, which puts the problem in a language everyone understands.