Federal Reserve Board chairman Jay Powell spoke at the Economic Club of New York last week and sought to prove that he met the standard laid out by John Maynard Keynes more than 90 years ago. The great man wrote, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” Pressed on how he really, really made monetary policy Powell, the world’s most important maker of that policy who, by the way is not an academic economist, said, “It is appropriate to have a little humility … to look out the window and rely on the evidence of your eyes…” which evidence tells him the economy “is expanding at a solid pace.”
The Economy And Jobs Market Run Hot
Put more colloquially, despite Fed efforts to cool it by raising interest rates, the American economy remains red hot, growing at an annual rate of 5.4 per cent according to the Federal Reserve Bank of Atlanta’s much-watched model. Household wealth has increased 37 per cent in the past three years to an average of almost $193,000. Factory production and retail sales again “surprised at the upside” last month, to use the economist’s way of confessing error. Sales by non-store retailers jumped 8.4 per cent, and “food services and drinking places” were up 9.2 per cent. The latter figure would have been higher had not worker shortages and high quit rates – 5 per cent, double most other industries — forced curtailments of opening hours in many areas.
The overall jobs market also remains hot, although Powell sees it coming “back into balance”, citing evidence of falls in job openings and quits. But the economy added 336,000 new jobs last month. Claims for unemployment insurance are at their lowest level since January. “Help wanted” signs festoon shops in cities that have not had their retail businesses wrecked by unpunished looting and homeless immigrants camping in store fronts. Wages are rising faster than prices, the share of employers offering paid time off has risen from 63 per cent in 2019 to 70 per cent, and the share offering parental leave is up from 28 to 39 per cent. Employers, or at least most, are not philanthropists, and are offering these benefits to compete for workers now that the five-day work week is a relic in many firms, and regular attendance at an office is considered quaint.
Some Happy Workers, Some Strikers Demanding More
Little surprise that worker satisfaction, as reported by the Conference Board, stood at 62.3 per cent last year, up from 56.3 per cent before covid hit, and its highest level since the survey began in 1987. But worker satisfaction is not ubiquitous. Many workers want to make up for concessions made when times were hard for their employers, match the percentage compensation increases of their CEOs, or, if they have not already done so, catch up with inflation. News web site Axios tallies 188 strikes involving 47,800 workers between January 1 and October 11 2021; that figure for the latest comparable period is 318 strikes involving 462,000 workers.
Handsome wage gains for parcel deliverers and airline pilots – around 40 per cent over 4-year periods – set a benchmark for the United Auto Workers union. It is running an ever-more-encompassing strike in pursuit of a 36 per cent increase in hourly wages over four years and restoration of the cost-of-living (COLA) automatic adjustment that allows wages to keep pace with inflation. It also wants the work week reduced from five days, 40 hours, to four days, 32 hours, with 40 hours of pay, and new battery manufacturing plants covered by any agreements reached with auto makers. The question of the industry’s international competitiveness and job losses does not seem to be on the UAW agenda.
Nurses also went on strike for more money but, most important, better staffing to relieve stress at work and improve the quality of care. A study by Jonathan Gruber and Samuel Kleiner of MIT and the Federal Trade Commission, respectively, concluded that strikes by nurses in New York State increased in-hospital mortality by 19.4 per cent and increased readmissions by 6.5 per cent. There are no data showing whether a shortage of entertainment content or rows of unsold EVs had a similar deleterious effect on consumer welfare or the climate, respectively.
Stuff Deliverers Gloomy, Service Providers On A Roll
The shift from goods to services, from stuff to experiences, from that new couch to that new dish by a celebrity chef is bad news for parcel delivery services. UPS and FedEx are anticipating a holiday season so dreary that they are forgoing their usual holiday-period surcharges. The consultancy ShipMatrix estimates that the industry will deliver 82 million parcels per day between Thanksgiving and mid- January, down from 90 million per day in the same period in 2022.
But good news for others as the “creative” half of Joseph Schumpeter’s “creative destruction” cuts in. Enter Instacart, market value of about $7 billion; Uber Eats, market value $20 billion; and Door Dash, market value about $30 billion, to handle shopping and schlepping supplies from supermarkets, and dinners from restaurants.
Which brings us to the problem facing the Fed’s policymakers. Inflation as policymakers measure it (they prefer to exclude food and gasoline, the two products most important to most consumers), says Powell, is coming down, although September data were “somewhat less encouraging”. The Bank for now is counting on the lagged effect of its past rate increases and on falling bond prices, which have driven the interest rate on 10-year treasuries above 5 per cent for the first time in 16 years, to slow the economy and cool inflation while the Fed adopts a policy akin to what doctors call “active monitoring”. Many expect 5 per cent to be the new normal, replacing the almost zero of recent memory.
Deficit And The Cost of Leadership Rise
Unfortunately, government spending, which with falling tax revenues effectively (after eliminating some accounting legerdemain) doubled the deficit in the 2023 fiscal year ending to $1.7 trillion, is due to rise. Spending caps agreed with Republicans in June will be doffed, and not only because Biden is calling for $105 billion in emergency funds – $61.4 billion for Ukraine; $14.3 billion for Israel; $7.4 billion for Taiwan and Indo Pacific; $9.15 billion for humanitarian aid to people affected by fighting; a reluctant $13.6 billion for border security – part of the cost of world leadership. Not all politicians are willing to bear that cost. Several Republicans, following the lead of Trump, are finding aid to Ukraine burdensome, and progressive Democrats aid to Israel objectionable.
In the face of so much economic and geopolitical uncertainty, Powell says the Fed “is proceeding carefully.” Considering the alternative, that is good news indeed.