We get the September employment report tomorrow. It’s still interesting, but its importance in setting monetary policy has waned under the Fed’s new strategy. From my Bloomberg article today:
The U.S. employment report that is usually released on the first Friday of every month has traditionally been viewed as the most important piece of economic data. No longer. The Federal Reserve’s new monetary policy regime has relegated jobs data to the back burner while thrusting inflation to the forefront.
Continue reading here at Bloomberg Opinion.
Wall Street expects the economy added 850,000 jobs in September, down from the 1.4 million pace of the prior month. In a thread well-worth reading, economist Ernie Tedeschi argues that incoming data tells two very different stories
In summary, some data suggests tomorrow’s jobs report–the last one before the US election– will show an economy severely losing momentum coming out of the summer. But other data is consistent with employment growth accelerating. https://t.co/YXKBLvaB5m
— Ernie Tedeschi (@ernietedeschi) October 1, 2020
Sustaining a solid pace of job growth is important for maintaining household incomes in the face of declining fiscal support:
I think we should pay more attention to the bottom line than the top. To support spending growth, the economy needs to keep closing the gap between income excluding transfer payments and its pre-recession trend, currently around 4.6%:
Even though fiscal support is on the decline, it is still sufficient to hold the pace of savings well-above pre-recession trends:
This more than anything is forced savings from the inability to spend on the typical bundle of goods and services coupled with massive fiscal flows to households. Unsurprisingly, the stock of excess saving thus keeps building:
while checkable deposits keep rising:
and revolving credit debt keeps falling:
Aggregate incomes including transfer payments are still more than sufficient to boost spending, but spending growth is slowing nonetheless:
The main impediment to recovering the remaining lost ground is the virus. The services sector in general, but more specifically and leisure and hostility, will remain encumbered by the Covid-19 pandemic until we reach herd immunity (a long and hard road), create a vaccine, or develop an effective therapeutic treatment. I think that when those conditions are met, the forced saving this year will flow quickly into demand. Supply chains in leisure and hospitality may have become too damaged to easily absorb that demand.
Finally, inflation continues its rebound from pandemic lows:
Core inflation remains 40bp below the Fed’s target of 2%. That proved to be a difficult 40bp to hold in the last recovery; if the current expansion follows the same pattern, the Fed will hold rates near zero through at least 2023 as FOMC meeting participants currently expect. The inflation number is the most important policy number now.