This Really Is What a Macroeconomic Soft Landing Would Look Like
Justin Wolfers on Threads is doing a very good job of summarizing key economic reports these days:
Justin Wolfers: ‘A steady-as-she-goes strong jobs report. Payrolls rose +150k, and while unemployment ticked up a little (to 3.9%), it remains below 4%. Revisions subtracted -101k from job growth over the prior two months. And so over the past 3 months, payrolls have averaged +204k, which is still extraordinary for this stage of the cycle.
Note that this month's payrolls number is probably about -30k lower than it otherwise would be, due to the UAW strike. That'll bounce back as an extra +30k next month…. The noisier household survey shows employment fell -348k. The average work week shrank slightly. Nominal wages grew only 0.2% in October, and by 4.1% over the year, a touch below expectations. The Fed will be very happy to see this, as it points to weakening inflationary pressure. Wage growth is clearly slowing. Annualized rates of wage growth over the past:
1 month: 2.5% (4% prior month)
2 months: 3.2% (4.0% over prior 2 months)
3 months: 3.2% (4.8% prior 3 months)
6 months: 4.0% (compared 4.2%)….
Employment growth is moderating to sustainable levels. Labor supply remains robust. Wage growth is moderating to rates consistent with the Fed's inflation target. If you wrote the script for what a 🛫soft landing🛬 looks like, we're following the script remarkably closely…. Job growth at this rate at this point in the expansion is almost unheard of. The numbers aren't as hot as recent months, but those were extraordinary, and these are only really good. The unemployment rate has now been below 4% for 21 straight months. The last time this happened was January 1970; the time before was September 1952…
I confess that I am distressed that people are flocking to Threads. Yes, right now it is a good platform. No, it is not going to stay a good platform. Why not? Because Mark Zuckerberg and company are not in the business of being good stewards for the future of humanity, but rather of making money. I really wish a whole bunch of the Threads energy were going to BlueSky or Mastodon instead.
That said, what do I think of Justin’s analysis?
Well, it is right: If we were having a soft landing, this is exactly what it would look like.
I would put special emphasis on the deceleration in nominal wage growth. With a pessimistic 1% per year rate of average labor-productivity growth, we need a wage-growth number of 3.5%/year to be consistent with the Fed’s 2%/year PCE inflation target. With a more neutral 1.5% per year rate of average labor-productivity growth expected, we need a wage-growth number of 4%/year. And if we think (as I do) that we are in the process of reversing some of the income shift from labor to capital that has taken place over the past generation and a half, then the warranted rate of nominal wage increase is even higher.
Thus we have my bottom line, as I said up top: As far as nominal wage growth is concerned, it looks as though we are in a soft landing.
Which makes the gyrations of the long-term bond market since mid-September—if not before—very weird. There has been little in economic news or in Federal Reserve chatter over the past year that would lead one to think that fundamentals are changing. Little news about whether r* is shifting. No news about whether the Fed’s bias with respect to aiming a bit higher or lower than r* over the next decade is shifting. And yet the Ten-Year Treasury has been all over the place:
My bet is that a bunch of the 100-basis point runup in the safe long bond inflation-adjusted rate is going to be reversed. If not, we have a hell of a lot of shifting of the slope of the intertemporal price structure for no fundamental reason that I can see.