Economist Writing Every Day

Well, the great “Recession Starting Next Quarter” that has been predicted for nearly two years is nowhere in sight. In fact, the Bureau of Labor Statistics just last week posted an absolute blowout jobs number:

The U.S. economy churned out a blockbuster 336,000 jobs in September, smashing economists’ expectations and heightening the risk that policymakers will have to push even harder to slow down the economy. The data released Friday by the Bureau of Labor Statistics offered yet another snapshot of the job market’s remarkable strength, with the unemployment rate holding at 3.8 percent and wage growth outpacing inflation in a boost to workers. But it was also the latest example of an economy that simply refuses to slow down, despite the Federal Reserve’s aggressive attempts to get prices and hiring closer to normal levels…The September report, which showed the largest number of gains since January, had been expected to indicate continued moderation in the labor market, with forecasts of around 170,000 jobs created. Instead, it came in at nearly twice that amount. (Lauren Kaori Gurley and Rachel Siegel , Washington Post)

Before we get too excited, let’s note that the BLS numbers have a strong component of BS: nearly every jobs number they put out is quickly, quietly revised downward by 20% or so. Also, much of the jobs creation this year has been in the part-time category (so employers don’t have to pay health benefits). That said, it is indisputable that despite ferocious interest rate hikes, the economy continues to hum along, much more robustly that nearly anyone predicted six or twelve months ago. Why?

I suggest that we follow the time-tested approach of investigative reporters, which is to follow the money. We have noted earlier that since 2020 a key factor in consumer spending, which constitutes about 70% of the economy, has been the ginormous windfall of free money, over $4 trillion, that was put into the economy via various pandemic-related programs (enhanced unemployment benefits, direct stimmie payments, etc.). The story of the recent strong jobs market is largely the story of spending down that windfall.

When we were locked down in late 2020-early 2021, we consoled ourselves with ordering tons of goods on Amazon. While this generated some jobs for longshoremen and UPS and Amazon drivers, it was mainly Chinese workers who benefited from this phase. But for the past year and a half, we are out there in planes, trains, automobiles, and cruise ships, spending for services and restaurant food at a brisk pace. This has buoyed up the domestic economy, which in turn is keeping inflation far above the Fed’s 2% target.

Part of the incoming-recession story has been that the COVID windfall money is about to run out. For instance, here is a June, 2023 chart from Fed authors de Soyres, et al.  showing that in the U.S. (black curve below) this money has already been exhausted:

A different set of Fed authors (Abdelrahman and Oliveira of the San Francisco Fed) wrote, also in June, that there remained a smidge of excess savings, but that “would likely be depleted in the third quarter of 2023.”

However,  the Bureau of Economic Analysis (BEA) recently completed an update of national economic data that lowered the savings rate prior to the pandemic and increased it in 2020 and 2021. This basically reflected a change in the way the BEA accounts for income from mutual funds and REITS. The bottom line is that it has forced Wall Street economists to increase their excess savings projections to date by as much as $600 billion to $1 trillion, depending on the economics team. This in turn leads them to delay forecasts of recession by yet another 6-12 months.

For instance, James Knightley of ING Global Markets Research writes that there are still plenty of excess savings around; recent revisions in their numbers show the remaining hoard is even larger than they originally thought:

They did not break down this excess saving by income group, so it is possible that much of it remains with the upper 10-20% who may hoard/invest it, versus the bottom quartiles who have been spending it all into economy and now may be tapped out. We shall see how this continues to play out.