I’m back from my annual fall fishing trip up north. Much has happened and it’s time to get caught up.
The economy’s doing quite well. In September, the unemployment rate fell yet again to 3.7%. Economists are wringing their hands over the tight labor market. Every month, the Federal Reserve proclaims the economy to be at “full employment,” a condition likely to yield rising labor costs, fueling unwelcome inflation. Yet, every month the economy adds more jobs and somehow manages to find workers to fill them. Now we’re really at full employment, says the Fed. Another month. More jobs added. “Now we’re really, really at full employment.” And on it goes. This supposedly tight labor market is the Fed’s chief justification for raising interest rates.
It’s almost as though there’s a conspiracy to stir up hysteria about an over-heating economy. On Tuesday, the Fed released its “JOLTS” report of the number of job openings, noting that the number of job listings exceeded the number of people reported to be actively seeking employment. What they don’t tell you is that that’s perfectly normal. “Job seekers” is a figure taken from the unemployment report. But if you’re simply changing jobs and never filed for unemployment, you’re not counted. Many job opening listings are simply positions opened up by people who have left for other jobs, often because they have decided to simply relocate from one place to another. It’s a weak measure of the health of the economy. Nevertheless, ECONODAY had this to say about the report: “Jerome Powell (head of the Federal Reserve) concedes that it’s a mystery why wages haven’t been going up very much as demand for labor grows and the supply of labor declines. Yet sooner or later, the law of supply and demand is bound to assert itself, at least this is the risk that the Fed is guarding against in its rate-hike regime.”
Yesterday, commenting about the weak report of existing home sales, ECONODAY had this to say: “The lack of wage gains, however, is a negative for home buyers not to mention a great mystery of the 2018 economy given the increasing scarcity of available labor. And another great mystery of this year’s economy is the lack of interest in home ownership.”
Is it a lack of interest in home ownership, or a lack of the wherewithal to buy a home in the face of rising interest rates (driven by the Fed) combined with the “great mystery” of a “lack of wage gains?” People don’t just lose interest in owning a home. Everybody wants a place they can call their own. The problem is that not everyone can afford it.
There’s really no mystery here. Anyone who has followed this blog or has cast a cynical eye on the employment statistics ever since the “Great Recession” knows that the unemployment rate is completely bogus, driven down artificially by the Labor Department claiming that people have dropped out of the labor force. During the Obama administration, 6.4 million workers mysteriously vanished. Since Trump took office, that figure has shrunk by over a million workers, but an honest tally of the unemployed still stands at 11 million workers (including those who were unemployed before the “Great Recession”) and unemployment is actually at 6.6% instead of 3.7% – a rate nowhere near low enough to begin driving wages higher. Per capita employment remains exactly 1% below the level it was at before the onset of the “Great Recession” – a figure that was already depressed.
So the economy is doing well – better than it has done in the past ten years – but that’s not saying a lot. The tax cut that went into effect this year gets the credit, but that will only carry the economy so far. To keep it going – to accelerate the economy even further – we need progress toward cutting the trade deficit, especially the deficit in manufactured goods. The Trump administration has made a lot of moves in that direction, imposing 10% tariffs on steel and aluminum, tariffs on $25 billion of Chinese imports, followed by 25% tariffs on an additional $225 billion of their imports, the renegotiation of the North American Free Trade Agreement (NAFTA) and threats to impose tariffs on all auto imports.
But there’s no evidence of any improvement in our trade situation, at least not yet. The most recent trade data show that the rapid erosion of American manufacturing continues, yielding a trade deficit of $70 billion in manufactured goods in August – a new record – with new record trade deficits with China and Mexico.
That’s not an indication that Trump’s tariffs are a failure. Aside from the small tariffs on aluminum and steel, none of the above-mentioned initiatives have taken effect yet. The biggest chunk of the tariffs on China went into effect in September, so the effect on trade with China won’t show up until new trade data is released next month. The “USMCA” agreement – the replacement for NAFTA – hasn’t been enacted yet. And the trade deficit with China was artificially swollen by a rush to beat the tariffs.
It’s going to take a lot of patience to realize the real benefits of Trump’s trade policy. The purpose of tariffs is to provide an incentive to manufacture products domestically. The immediate effect will be to raise prices for American consumers, just as economists have warned. Longer term, companies will begin to realize that they can improve profits by manufacturing in the U.S., thus avoiding the tariffs. It’s going to take time for that realization to sink in, and time for companies to implement plans to build factory capacity in the U.S. Ultimately, when that capacity comes on line, we’ll see a real boom in the demand for labor and a corresponding rise in wages, more than offsetting any increase in prices.
Hopefully, the Federal Reserve won’t torpedo the economy in the meantime. It can’t have any impact on price increases driven by tariffs, so it would be pointless to even try. All they can do is drive the economy into recession with their high interest rates, raising doubts about the president’s economic policies, and increasing the chances that America will shrink back into its role as host in the global host-parasite trade relationship. That would be a disaster.
Again, it’s going to take time and patience. It took seven decades of globalism (beginning with the signing of the Global Agreement on Tariffs and Trade – GATT – in 1947) to get us into the fix we’re in. It’s going to take more than a year or two to get us out.