Unemployment: We Should Be Dancing in the Streets

Record high of 6.6 million hires per month, above pre-pandemic record 6.0M.

Record low layoffs at 1.3M per month, down from 1.8M pre-pandemic record. Yes 5 new hires for every layoff!

Record 11 million plus, up from pre-pandemic record of 7 million.

Record 7% of jobs are open, far above pre-pandemic 4.4% record level.

Job seekers to open positions ratio is less than 1/2, all-time record low, down from pre-pandemic record that was just below 1:1.

Average hourly wage up 12% to record $31.95.

Hours worked is slightly higher than before the pandemic.

Record high 2.9% versus pre-pandemic record of 2.3%.

Unemployment rate is 3.6%, just above pre-pandemic 3.5%. Prior 3.5% rate was in 1969. This is the best in 50 years.

Underemployment rate at 7.1% is just above 7.0% pre-pandemic level. Underemployment rate was last this low in 2000.

Long-term unemployment is at 1.2%, same as pre-pandemic level. The economy last delivered this positive level in 2000.

African-American unemployment rate is at a near-record 6% low. It was a little lower briefly before the pandemic.

Initial unemployment claims reached the pre-pandemic low of 190,000 during 2022, but has increased slightly to 210,000. This compares with typical levels of 400,000 in recent decades.

Continued unemployment claims are at a 50-year record low of 1.3 million, down from the pre-pandemic level of 1.8M. 1.3M was last seen in 1969!

Civilian labor force at 164.4M is just below the all-time record of 164.6M.

Prime age labor force participation rate fell from 84% to 81% by 2014. It recovered to 83% by the end of 2019. It has reached 82.5% so far in 2022.

Teen labor force participation has slowly increased for a decade.

College age labor force participation has remained the same.

“Older” age labor force participation hit an all-time low of 29% in the early 1990’s, and then began to climb all the way to 41% in 2012. It remained at 40% throughout that decade. It dropped with the pandemic and has since recovered to 39%.

Female labor force participation continued its long climb to a peak of 60% in the late 1990’s. It dropped below 57% by 2014. It increased to 58% in the last 2 years of the decade. It has recovered to 57% after the pandemic.

The male labor force participation rate has been declining for 70 years. It reached 69% in 2014 and remained there, without falling, throughout the decade. The rate dropped to 66% during the pandemic and has since recovered to 68%.

https://www.richmondfed.org/publications/research/econ_focus/2021/q1/district_digest#:~:text=Over%20the%20past%2050%20years,pandemic%2C%20it%20has%20fallen%20further.

Labor force participation has declined by about 10% for HS grads, some college and college grad groups. Non-HS grads’ participation has actually increased. The similarity of participation changes by education and gender points to broader social factors playing a major role in these “economic” changes.

Summary

The measures of demand for labor are all at record levels. Unemployment rates are at long-term lows, just above the pre-pandemic levels which were driven by a decade long economic recovery. Labor force participation is down by 1% compared with pre-pandemic levels. Overall, this recovery from the pandemic challenges exceeds all expectations.

Good News: Record Low US Unemployment

Fastest Ever Post-Recession Labor Market Recovery

https://fred.stlouisfed.org/series/UNRATE

9 States Reached All-Time Record Low Unemployment Rates in February

Nebraska, Utah, Indiana, Kansas, Arkansas, Mississippi, Montana, Oklahoma and West Virginia. The Republican leaning states are “winning”. The Bureau of Labor Statistics (BLS) has been reporting state data since 1976, so this is a GREAT result.

https://www.bls.gov/news.release/laus.nr0.htm

27 states reported unemployment rates below the optimistic “full employment” level of 4%. Another 17 were in the 4.0-4.9% range. Just 6 states were burdened with unemployment rates above 5.0%, with New Mexico at 5.6% the highest.

https://www.bls.gov/web/laus/laumstrk.htm

4 of the 51 “Large” Metro Areas Reported All-Time Record Unemployment Rate Lows This Year

Salt Lake City, Indianapolis, Oklahoma City and Atlanta set new records.

Geographically dispersed Nashville, Tampa, San Jose, Phoenix and Louisville are very close to setting new records.

https://fred.stlouisfed.org/series/SALT649URN

https://fred.stlouisfed.org/series/INDI918URN

https://fred.stlouisfed.org/series/OKLA440URN

https://fred.stlouisfed.org/series/ATLA013URN

As with the states, the distribution of results for the 51 metro areas with 1 million + populations is quite convincing. 8 metro areas are below the “unsustainable” 3.0% gold standard. 29 metro areas are below the 4.0% “full employment” level. 43 metro areas are below 5%. 8 areas exceed 5%. Detroit is second worst at 5.4%. Cleveland is in last place, struggling with 6.4%.

https://www.bls.gov/web/metro/laulrgma.htm

Unemployment Rate Will Fall: Record Open Jobs

https://fred.stlouisfed.org/series/JTSJOL

Unemployment Rate Will Fall: 500K Net Jobs Added Each Month in the Last 12 Months

https://fred.stlouisfed.org/series/PAYEMS

Unemployment Rate Will Fall: Labor Force Participation Rate May Increase 0.5% – 1.0%, But Not Further

https://fred.stlouisfed.org/series/CIVPART

Unemployment Rate Will Fall: Blue State Employee Returns From Covid Have Lagged

Red states have roughly returned to pre-Covid employment levels. Blue states have lagged by 3.5%. Mixed states have lagged by 2%. This can provide 3 million workers to fill some of the 11 million open jobs.

Unemployment Rates Will Fall: Wages are Up 11%

https://fred.stlouisfed.org/series/CES0500000003

Summary

I expect the overall unemployment rate will set a 68-year record in the next 3 months. The February 2020 3.5% and May 1969 3.4% lows will be eclipsed! Unemployment will be at the lowest rate in my lifetime (Jul 1956)! This is despite the many, many issues and risks we have on both the supply and demand sides of the labor market.

IMHO, there are many factors driving this GREAT NEWS. (1) American firms are making record profits based on domestic and global demand, so they are incentivized to hire more workers, even at higher than usual wages. (2) American firms are finding that they can pay higher than historic wages and still generate incremental profits from the incremental workers (see Costco). (3) The definition of “employable” workers is clear, but employers are slowly loosening their irrational requirements (college degrees). (4) Baby Boomers have accumulated unprecedented retirement assets, so they have slowly left the labor force in a “one way” exit. (5) The “informal” labor market has been institutionalized with Uber, gig, contract and temporary worker arrangements. (6) Reduced unemployment benefits have incentivized many (older, less skilled non-unionized) unemployed workers to reduce their “reserve wage” expectations and accept new employment at lower wages than their best historical experience. (7) With less stigma for “laying off” workers, employers are more actively hiring workers to fill all economically justified positions. (8) With lower recent illegal immigration, the “reserve army” of the unemployed is lower. (9) Modern recruiting systems provide employers with so many candidates that they are assured of finding matching workers relatively quickly.

In essence, we have a much more “efficient” labor market than in years past, so the minimum unemployment rate has been reduced from 5% to perhaps as low as 2%. This too, is good news.

President Biden certainly did not drive any of the above structural factors. However, he has not disrupted these forces or pushed fiscal or monetary policy to undo the good news. Sometimes, “leave well enough alone” is all that is required.

Good News: US Unemployment is at Record Lows

https://fred.stlouisfed.org/series/UNRATE

In the last 50 years, the last 600 months, the US unemployment rate has been below the current 3.8% for just 9 months (less than 2% of the time).

This is less than 2 years after the rate hit a modern HIGH of 15%.

9 states set all-time lows this month: Nebraska (2.1%), Vermont (2.1%), Indiana (2.3%), Kansas (2.5%), Montana (2.6%), Oklahoma (2.6%), Arkansas (3.1%), West Virginia (3.9%) and Mississippi (4.5%).

In February, 31 states had material decreases, while 19 had immaterial changes and NO states had material increases.

https://www.bls.gov/news.release/laus.nr0.htm

At the metropolitan area level, 50 areas sported unemployment rates of 3% or less, far below historical results.

11 areas were at crazy low 2.3% unemployment rates or lower: Lincoln, NE and Madison, Wi. Logan, Provo and Ogden UT. Elkhart, Columbus, Bloomington, Lafayette, Ft Wayne and Indianapolis, IN.

https://www.bls.gov/web/metro/laummtrk.htm

Good News: US Housing Market

Real Interest Rates Remain at Record Lows

Real, inflation-adjusted, interest rates have declined greatly since 1980. At that time, with the risks of variable inflation and surging oil prices, the real mortgage interest rate was 8%. It declined to 5% in the 1990’s and 4% in the 2000’s before falling to 2% in the 2010’s. The financial cost of owning property has rarely been lower.

House Values are Up, Way Up

House prices grew relatively consistently from 1970 through 2000, with a spike in 2005-9 and a return to trend values in 2010-12. In the last 10 years, house prices have increased by 6% annually in nominal terms, or 4% annually in real terms.

Home Ownership Rate is Rebounding, Up 2%

The US homeownership rate averaged 47% from 1900-40. It increased smartly in post WWII times to 60% by 1955 and 64% by 1965. Homeownership averaged 64%+ for the decade of 1969-78. It increased by 1% during 1979-81. In the midst of a difficult depression, homeownership rates dropped back to 64% by 1985, about the same for the last 20 years, setting a “normal” level. Homeownership rates stayed at 64% for the next decade. Ownership rates increased from 64% to 69% in the next decade before declining right back to 63% by 2015. In the last 7 years, despite many headwinds, the home ownership rate has increased by 2%.

Number of Homeowners has Jumped by 7 Million

In 2000, there were 69M owner-occupied homes in the US. This increased by a solid 7M to 76M by 2005. The housing market hit a lull and the number of owner-occupied homes essentially stayed flat for a dozen years, through 2017. The supply of owner-occupied homes then rose by a strong 7M in the next 4 years to 83M!

International Comparisons

https://en.wikipedia.org/wiki/Home-ownership_in_the_United_States

https://www.urban.org/urban-wire/us-homeownership-rate-has-lost-ground-compared-other-developed-countries

US homeownership rates are similar to other developed economies.

Housing Supply

https://www.mercatus.org/bridge/commentary/what-are-homeownership-rates-telling-us


The housing market is inherently volatile, typically rising by 2 times the trend and then falling to one-half of the trend. Annual housing starts averaged 1.6M from 1960-2008. They declined by a severe 75% to just 0.5M in 2009. Housing starts have subsequently grown 3-fold to 1.6M annual housing starts, but the accumulated lack of new supply is impacting housing markets today.

Housing Market by Segments

By Age Group

https://www.mercatus.org/bridge/commentary/what-are-homeownership-rates-telling-us

The period from 1982-2000 showed homeownership rates by the 5 age segments remaining relatively constant; 65+ 78%, 55-64 80%, 45-54 76%, 35-44 67% and <35 40%. The 65+ group increased homeownership from 75% to 80%. During this time, the overall US homeownership rate increased from 65% to 69%, mostly due to the aging of the population, now more heavily weighted towards the groups with 76-80% homeownership versus the 40-67% younger groups.

Homeownership rates grew from 2000 to peak rates in 2004, before declining significantly for all groups except for the 65+ cohort which essentially held it’s own. The adjacent 55-64 class fell 4%. The middle 45-54 group dropped 7%. The typically homeownership growing 35-44 group cratered by 9%. The young <35 group fell by 5%. Hence, the overall rate fell dramatically during this time.

https://www.bloomberg.com/opinion/articles/2021-04-15/home-ownership-for-millennials-may-finally-be-within-reach

This difference in home ownership experience is reflected in generational wealth summaries.

By Marital Status

https://en.wikipedia.org/wiki/Home-ownership_in_the_United_States

There is a 30 point gap between married couples and other groups, with 84% of married couples owning homes versus about 55% for other family structures.

By Location Type

https://www.census.gov/library/stories/2017/09/rural-home-ownership.html#:~:text=Rural%20areas%20have%20higher%20homeownership,holds%20in%20all%20four%20regions.

https://www.census.gov/newsroom/blogs/random-samplings/2016/12/homes_on_the_range.html

https://www.freddiemac.com/research/insight/20210602-rural-home-purchases

81% of rural households own their homes versus just 60% for urban households.

By Income Group

Historically, 80% of the top half of household incomes have been homeowners, while in the bottom half, just 50-60% have owned their homes.

By Racial Group

The US shows dramatically different homeownership rates by racial category. The differences between the 1995 non-Hispanic White rate (70%) and Others/Asians (50%), Hispanics (42%) and Blacks (42%) remain large in 2021 where we see White (74%), Other (57%), Hispanic (48%) and Black (44%). The groups homeownership share gain from 1995 to 2005 were similar, ranging from 6-10%, but the decline from 2005-2015 was only 3-4% for Whites and Hispanics, but 7% for Blacks and Others. The improvement from 2015 to 2021 has been 2% for 3 groups and 4% for the Other/Asian group.

Summary

The Great Recession flattened the housing market. The number of owner-occupied homes in the US remained level at 76 million from 2006 – 2017. The number of housing starts plummeted from 2.0M to 0.5M per year, compared with an historic average of 1.6M. New home construction first exceeded 1.2M units (75% of historic average) again only in 2020, a dozen years later. New home-owning households have increased by 7M units in the last 4 years! The homeownership rate is up 2 points, from 63.5% to 65.5%. Supply is responding to increased demand and higher home prices. Homeownership rates will increase with the economic recovery, but be constrained by higher home prices.

The Age/Experience Unemployment Rate Premium is Shrinking

Date16-2425-3435-4445+
Mar-9010.65.23.73.5
May-9214.47.75.85.2
Dec-009.23.72.92.4
Dec-0112.25.94.43.6
Mar-0710.04.33.23.3
Oct-0919.110.69.06.8
Sep-197.93.52.62.5
Apr-2027.414.511.512.8
Dec-2012.66.75.55.6
Feb-228.34.13.33.0

I’ve summarized the last 30+/- years of US labor market experience with just the peak unemployment rates of the business cycle, plus December, 2020 as a secondary indicator of the peak Covid/pandemic impact, since the actual peak numbers in April, 2020 were so extreme and short-lived.

Less experienced individuals have historically had higher unemployment rates in the US. Compared with the 45+ age group, the 35-44 age group has averaged 0.3% higher unemployment; 5.2% versus 4.9%, a relatively minor difference. The 25-34 year age group has averaged 6.6% unemployment, a substantial 1.7% higher rate. The job-seeking 16-24 year age group has averaged 13.2% unemployment, more than twice as high as the 25-34 year age group and more than 2.5 times the 45+ age group (8.3% extra).

The “extra” unemployment for 35-44 year olds versus the 45+ group has been zero for the last 15 years, versus a minor 0.5% premium historically. It appears that workers are reaching full employment value at an earlier age.

The “extra” unemployment for 25-34 year olds versus the 45+ group has been 1.0% for the last 15 years, a small reduction from the prior 1.5% premium.

The “extra” unemployment for 16-24 year olds at the peak of the business cycle versus the 45+ group averaged just 5.3% recently versus 7% historically.

The 2007-2009 recession showed a greater impact on modestly younger (25-44 year old) workers, with their unemployment rates increasing by 2.5% more than the 45+ group.

Despite the reduction in the inexperience penalty for youngest workers (16-24) in the last few years, they did experience much higher “extra” unemployment during both the 2007 and 2020 recessions.

Very young workers continue to be penalized for their inexperience, but other workers from ages 25+ seem to have relatively equal economic value today.

Note that the current unemployment rates for those aged 25+ already matches the average MINIMUM rates of the last 4 business cycles: 3-4%. The 8.3% unemployment rate for the 16-24 year age group is below the minimum in 1990, 2000 and 2007, and just above the 7.9% level of Sep, 2019.

https://fred.stlouisfed.org/series/LNU04000092

https://fred.stlouisfed.org/series/LNS14000091

https://fred.stlouisfed.org/series/LNS14000089

https://fred.stlouisfed.org/series/LNS14024887

Good News: Growing US Hotel Capacity, More Consumer Choice

Hotel capacity increased by 50% from 1995 to 2019.

Demand grew at the same 50% rate, although not always in lockstep.

Occupancy averaged a healthy 63% (almost two-thirds) through this period, with significant differences due to changes in construction and the economy.

The price per room averaged about $125 per night in real 2020 dollars, again varying based on supply and demand, but overall, relatively constant.

Total hotel industry real revenue ($2020) for the 21 years from 1998 through 2019 increased by a little less than 50% according to Bureau of Economic Analysis (BEA) figures.

Real consumer only (leisure) sales increased by nearly 100% during this period.

Real consumer sales per person increased by about two-thirds.

Resources

https://www.cushmanwakefield.com/en/united-states/insights/hospitality-and-gaming-lodging-industry-overview

https://apps.bea.gov/scb/2022/02-february/0222-travel-tourism-satellite-account.htm

https://www.bea.gov/tourism-satellite-accounts-data-sheets

https://fred.stlouisfed.org/series/CPIAUCSL#0

https://www.multpl.com/united-states-population/table/by-year

Other Historical Views

Domestic leisure travel doubled in the first 40 years of the 20th century.

https://data.bls.gov/pdq/SurveyOutputServlet

Hotel industry operating statistics before 1995 are not readily available. The tremendous growth of the industry in the last 30 years of the twentieth century is illustrated by the more than three-fold growth in industry employment, from one-half million to 1.8 million. Note that employment did not follow the growth of rooms during the first 20 years of the next century.

Oxford Economics developed an industry promotion brochure in 2019 that has some longer-term data. Total real (inflation adjusted) revenue is up more than 4 times in 40 years. Our 1995-2018 data shows relatively small changes in average hotel prices. I suspect that there were “real” increases from 1978 – 1995 as the industry was growing quickly in response to consumer demand.

A similar measure, gross domestic product (GDP), or production value added, net of the cost of inputs, increased 3-fold in 40 years.

Consumer spending on accommodations has increased about 3 times as fast as GDP overall in the last 40 years.

Hotel purchases as a share of total consumer spending has increased by more than 80% in these 40 years.

Overall demand for hotel rooms per citizen for all uses (personal, business, government and foreign travelers) has increased by 20% across 30 years. Personal and foreign travel have grown at a faster rate.

https://www.hvs.com/article/8587-How-Many-Rooms-Is-Too-Many-Per-capita-Demand-and-the-Hotel-Cycle

Short-term Rentals

The short-term rental market (personal vacation rentals, Airbnb) has grown from zero to 10% of the hotel room volume and appears to have years of growth ahead of it. This growth is not included in the industry summary figures.

https://www.phocuswright.com/Travel-Research/Research-Updates/2017/US-Private-Accommodation-Market-to-Reach-36B-by-2018

https://www.grandviewresearch.com/industry-analysis/vacation-rental-market

Pandemic Impact and Future

Occupancy is forecast to return to the historical average of 63% for 2022 and increase further in the following years. The industry “lost” more than $100B of revenues due to the pandemic, so analysts estimate that the industry will return to “normal” employment, prices, profitability and reserves by 2025.

https://www.pwc.com/us/en/industries/hospitality-leisure/us-hospitality-directions.html

Summary

Consumer access to hotels and private rentals has increased by 3 or 4 times in the last 50 years, at a faster rate in the first 25 years, and somewhat slower in the last 25 years. Hotel business models at 63% occupancy seem to justify continued capital investments in new supply. Prices have been relatively flat for 25 years. Competition between brands, pricing segments, corporations and private owners seem to be effective at providing adequate capacity and service options at competitive prices.

25 Years of Inflation by Category

https://fred.stlouisfed.org/series/CWUR0000SA0#0

https://fred.stlouisfed.org/series/CWUR0000SAF#0
https://fred.stlouisfed.org/series/CWUR0000SAT#0
https://fred.stlouisfed.org/series/CWSR0000SAH
https://fred.stlouisfed.org/series/CWUR0000SAA#0
https://fred.stlouisfed.org/series/CWUR0000SAR#0
https://fred.stlouisfed.org/series/CWUR0000SAE#0
https://fred.stlouisfed.org/series/CWSR0000SAE2
https://fred.stlouisfed.org/series/CWSR0000SEEB#0
https://data.bls.gov/pdq/SurveyOutputServlet
https://fred.stlouisfed.org/series/CWUR0000SAG#0
https://fred.stlouisfed.org/series/CWUR0000SEGA#0
https://fred.stlouisfed.org/series/CPIMEDSL#0
Category97-20%97-22%%Share
All5975100.0
Food/Beverage648215.1
Transportation454521.9
Housing728539.9
Apparel-5-52.6
Recreation17224.4
Educn/Communicn27316.2
>Communication-25-23
>Tuition, Fees, Child Care165171
>>College Tuition191196
Other Goods/Services1221392.8
>Tobacco/Smoking362424
Medical Care1161257.1

Analysis

Inflation is back in the news after several quiet decades. The components of the All Urban Wage Earners and Clerical Workers are listed above, comparing Feb 2020 with a 1997 base of 100, and then Jan 2022 with the same base. The most recent weighting of categories is in the rightmost column.

Overall, consumer prices have risen by a modest 2-2.5% annually, just 59% through Feb 2020 and 75% through Jan 2022. Yes, that is a 10% price increase in the last 2 years: 175/159.

The 3 largest components have shown price rises close to the overall average. The biggest sector, Housing (39%), displays slightly higher inflation, at 72% and 85%, closer to 3% annually, with a possibility of higher rises for the next few years. Transportation (22%) reveals lower than 2% annual inflation with a 45% increase across the full period. Food and Beverage (15%) is close to the average with 64% and 82% growth.

Some smaller areas have seen slow price growth. Apparel (3%) has declined in actual prices during this period. Recreation prices (4%) have grown by less than 1% annually.

Education and Information (6%) prices have grown by 1% annually, but this category includes 3 very different subsectors. Information Technology prices have declined throughout the period. No simple 25- year summary is available. Communications prices have dropped by an average of 1% annually. Education prices have grown much faster, more than offsetting the decline in IT and communications prices. The Tuition, Fees and Child Care measure of prices increased by 165% and 171%, more than twice as fast as overall inflation, roughly 4% annually. College tuition (data not in Fred database) increased by 191% and 196%, about 4.5% per year.

The Other Goods and Services (3%) category mostly contains miscellaneous items that don’t fit cleanly in Housing or Food/Beverage. The category displays faster price increases (3.5%) on average due to the very sharp increase in Tobacco prices (taxes) which have grown 4-fold in 25 years (7%/year). Note that alcoholic beverage prices increased by a little more than 2% annually

Finally, Medical Care (7%) has grown by 116% – 125% during these 25 years, about 3.5% annually.

Overall goods prices have grown slowly and service prices more rapidly. Medical care and college prices stand out for their increases, while the price of housing/rentals is flashing warning signs.

Why is Inflation 7%?

https://fred.stlouisfed.org/series/CPIAUCSL

Easy Monetary Policy

https://fred.stlouisfed.org/series/FII10

The “real” interest rate is the nominal interest rate minus the inflation rate. It reflects the “real” cost of borrowing. Prior to the “Great Recession”, 2% was a typical “real cost” of borrowing money. To entice lenders to lend, borrowers had to pay some “real” amount extra per year, 2%.

The Federal Reserve did what it could to “ease” monetary conditions and lower interest rates to offset the negative impact of the Great Recession in 2008-9.

By the end of 2011, real rates were ZERO or negative. In other words, the Fed went too far. By June, 2013, rates returned to positive territory, but only reached 0.5%, where they remained through the end of 2017, despite president Trump’s complaints that the Fed was constraining the Trump economy. Monetary policies were “easy” for a very long 7-year period.

By May, 2019, real interest rates were back to just 0.5%, having reached a peak of just 1% for 3 months at the end of 2018. With further “easy” money policy, real rates dropped back to ZERO percent by August, 2019. The economy was now 9 years into recovery. Interest rates should have been higher.

The Fed found new ways to “ease” monetary policy as the pandemic struck in 2020. Real interest rates dropped to -1% and stayed there. Monetary policy has been “easy” for more than a decade. Time for inflation. “Too much money chasing too few goods”. “Inflation is always and everywhere a monetary phenomenon”.

Supply Chain Disruption

The recovery has been faster than anyone expected, but most critically, with consumers less eager to buy “in-person” services, they have greatly increased their purchases of goods. The modern US economy relies on imports and modern manufacturers and retailers hold lower inventories to buffer changes.

https://fred.stlouisfed.org/series/ISRATIO

https://fred.stlouisfed.org/series/PCEDGC96

Yes, durable goods purchases jumped by 20% in 1 year, from $1.8T to $2.2T. Businesses have simply been unable to adapt to that scale of change.

Easy Fiscal Policy / Large Budget Deficits

https://fred.stlouisfed.org/series/FYFSGDA188S

Standard macroeconomic theory focuses on aggregate demand versus aggregate supply as the key driver of output, unemployment and inflation. When total demand grows faster than remaining excess capacity of total supply, inflation results. The biggest driver of changes in aggregate demand is the level of government spending (demand) minus government taxation (reduces demand).

Historically, various pressures have kept the federal budget deficit between -3% and +3% of GDP, allowing the government to buffer change in private demand through the business cycle. The large drop from -2.5% to -5% in 1979-82 was a factor that contributed to the last major round of US inflation. A similar decline from -2.5% to -4% in 1989-91 increased inflation, but not on such a large scale. It also served to convince President Clinton and congress to reduce the deficit to ZERO by 1997 and run a surplus for a few years.

The 2001 recession caused a 2.5% decrease in this ratio, from a surplus to a deficit. Bush tax cuts, foreign wars and congressional agreement lead to deeper deficits at 3.3% in 2003-4, before some recovery to -1% in 2007, prior to the Great Recession.

Bush, Obama and congress agreed to spend more to fight the Great Recession, pushing the deficit to a worryingly low -9.8% in 2009. There was no agreement on a second major round of spending, so the deficit improved a bit to -6.6% by 2012 and then to a more reasonable -2.5% in 2014-15. Instead of continuing to improve with the economic recovery, it fell a little, to 3.1% in the last year of the Obama economy.

President Trump’s first order of business was to enact “job creating” tax cuts. Unfortunately, the desired boost to economic growth to fund these tax cuts did not occur. The budget deficit increased from 3.1% to 4.6% of GDP, as the economy reached a record long recovery period of a full decade.

To address the pandemic, congress and Trump agreed to spend money to protect the economy and workers, leading to very large budget deficits of 15% and 12% in 2020 and 2021, respectively. Too much aggregate demand for the level of aggregate supply, so we have major inflation.

Summary

Easy money, easy fiscal policy and a 20% increase in demand for goods leads to major inflation. Like a frog getting boiled as a pot slowly warms up, we became complacent based on the apparently “just right” conditions of the late teens (2012-19). The federal budget deficit needs to get back above -5%, real interest rates need to become positive and consumers need to rebalance to consume more services and less goods. I don’t think we’ll see 7% inflation for 2022, but it looks like 4-5% is a good bet. Hold on.

Politics

Biden deserves a good share of responsibility for the government spending budget deficit, as he was seeking to make it even larger. I give him a “pass” on consumer demand for durable goods since it mostly occurred before he started. I also give him a “pass” for the loose Fed monetary policy which has been going on for a decade or so. He was wise to reappoint the Fed chairman, who I believe will raise interest rates as needed to get the real interest rate back to a proper level. In the meantime, Biden will pay politically for higher inflation, which has a “real” impact on the wallets of voters.

https://apnews.com/article/coronavirus-pandemic-business-health-prices-inflation-bd71ae9e491907a51956c1d4eb07fb90

Good Economic News

Better off, job seekers/job openings.

US GDP/Capita versus Other Countries

Long-term Real US GDP Growth

6 million jobs added in 2021

Great Labor Market

Higher Effective Minimum Wage

Very Low Unemployment

Are You Better Off Economically? Yes!

Labor Productivity

Labor Force Participation