The U.S. Economy Totally Misunderstood

The only thing I can say about Friday’s incredibly strong jobs report is that it makes a lot more sense that it was strong than it was very weak. , those who are confused that it was strong are really confused in a larger sense of what is really going on in this economy.

US economy continues too hot and not too cold. Think of it this way: Nominal GDP – Inflation = Real GDP. Inflation has hit 9% in recent months, which is itself a sign of overheating. If it’s just food/energy/supply chain/Ukraine, prices are skyrocketing. in those areas would, all other things being equal, create Lower price elsewhereInstead, broad price levels across the board have risen significantly.

Anyway, with 9% inflation, just think how high nominal GDP would have to be to keep real GDP positive. Very expensive. For example, nominal GDP jumped 10.1% last year. In the fourth quarter alone, it surged a staggering 14.5% (annualized rate). On God’s Green Earth, how is the US economy exploding that kind of ‘growth’? .

The problem is that those who say the economy is actually very weak are, in a way, correct.this economy not equipped anywhere Sustained growth at nominal 15% or 10% or 5% to be honest. In fact, with low population and productivity growth, current potential GDP is so bad that sustaining nominal GDP much higher than 3% or 4% is probably impossible in the long run. A 10% or 15% explosive increase due to a massive government stimulus package, It all leads to higher prices, not higher real economic activity.

One “version” of this problem manifests itself in a labor market that is too strong. Yeah… too strong. There are too many job vacancies, exacerbated by the excessive “phantom demand” caused by all the stimulus measures and the shortage of regular migrant workers for political and pandemic reasons.we I never have The last cycle added 500,000 jobs each month. Literally about 15 years after the financial crisis, the strongest employment ever seen was about 400,000 months.

And yes, there was a need to fill the gaps in workers laid off when the pandemic hit. indicates that you should Meanwhile, the internet, cryptocurrency, furniture and warehouse sectors are growing at unsustainable rates and moving into layoffs or stabilization mode. To be sustainable, as even President Biden has acknowledged, the pace of job growth needs to slow to around 150,000 people a month.

Instead, it added 528,000 jobs last month. This makes sense, as weekly new claims for unemployment benefits, while slowly rising from last year’s unsustainably low levels, are still fairly low by historical levels. And despite a significant drop in the number of vacancies in the latest report, vacancies still indicate a significant need for workers.If Nominal GDP has thus remained strong.And sure enough, MKM’s Michael Darda thinks it’s possible yet We are currently running double digit pace with our average weekly payroll surrogate. Think about it!

If, as many economists and investors argue on the show, nominal GDP is still two to three times higher than sustainable levels, inflation will likely fall to 2% next year. of course The Fed must now continue to tighten aggressively. As Bob Pisani so eloquently points out, the stock market hasn’t even fallen out of bed as a result.In fact, the S&P500 14% up Since the Fed hiked rates by 75 basis points for the first time in mid-June.

I also pointed this out in late June. The Fed’s mega rate hikes have had exactly the expected effect across markets. Commodity prices have fallen significantly, but stock prices have risen. Credit markets look open enough for business when it comes to warnings of causing stress in financial markets. Facebook’s parent company Meta issued a $10 billion bond for the first time last week, offering a triple-subscription It went live. According to Bloomberg, 10 more companies could go on sale today, with a total of $120 billion in new debt sold over the past three weeks.

This is not a “mysterious…shape-shifting economy that shifts from week to week” or a “rewriting the rules” economy. It’s something you haven’t seen in a long time. Fortunately, Fed policymakers now seem to understand its true inflationary and overheating nature. No one can predict whether next year’s recession will lead to an actual recession, as the yield curve suggests. But if the Federal Reserve does not address the current real inflation and overheating economy, our situation will be much worse.

See you at 1pm!


Twitter: @KellyCNBC

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