Steady as she goes
After all of my recent TDS posts, I better say something about the economy before I lose all of my intelligent readers.
We are now in the longest economic expansion in US history. That’s good, but what really matters is achieving America’s first ever soft landing (defined as 3 years of low and stable unemployment and stable prices.)
Fortunately, I’m likely to live long enough to see if that happens. We’ll know by late 2021. (In contrast, I doubt I’ll live long enough to find out what happens to Hong Kong after 2047.) So if you are bored right now, be assured that something very interesting will definitely happen in the next 2 years. Either the first ever American soft landing, or an outcome that is even more interesting.
I’m cautiously optimistic, although of course the fact that we’ve never had a soft landing is an indication that there are risks ahead. The recent data seems consistent with my view early in the year, which is that there is an elevated risk of recession, with a likelihood that is still well below 50%. We see continued strong job creation, but other signs of weakness such as slowing manufacturing and sagging interest rate futures. I’m also a bit worried about the recent dip in wage growth, although that may bounce back next month.
There are two arguments that monetary policy is too tight:
1. Inflation is running a bit below 2%, and is likely to continue doing so.
2. Forward indicators show economic softness going forward.
When you see commentators in the financial press who oppose monetary stimulus, they tend to completely ignore the inflation target and focus on the cyclical indicators. And right now the economy is quite strong, with the lowest peacetime unemployment rate since 1929. From a Phillips curve perspective, it seems crazy to call for monetary stimulus when we have 3.5% unemployment.
The fact that the Fed is cutting rates despite the low unemployment rate is actually a good sign; it’s an indication that the “market” part of market monetarism is increasingly taken seriously within the Fed. If only they had done so in 2008.
While I lean in a “dovish” direction at the moment, I also believe that many people are too dovish. Policy is not far off course, despite yield curve inversion. This is pretty close to what monetary stability looks like.
I am told that a new NGDP futures market should be up and running fairly soon. Although I’m not a forecaster, just for fun I’ll predict that the market will show a 3.5% NGDP growth forecast for 2020:Q1 to 2021:Q1. My forecast applies to the market one week after trading begins, and the price has settled down. Fortunately, 3.5% NGDP growth is enough to avoid recession and keep unemployment in the mid-threes. But inflation will continue to run slightly too low.
If I’m wrong about NGDP futures, then I’ll revise my current view that policy is now close to optimal, albeit slightly too contractionary.
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5. October 2019 at 11:44
“The fact that the Fed is cutting rates despite the low unemployment rate is actually a good sign”
Are they slowly acknowledging, at least implicitly, that the Phillips curve is kaput?
5. October 2019 at 12:15
Recession 2020: count on it.
5. October 2019 at 14:08
Scott, according to the weekly reserve balance stats available via the FRED database, reserves have increased by almost $180 billion over the last few weeks. I assume this is due to the liquidity injections in the repo market. Does the increase in the supply of base money help to address your concern that monetary policy is slightly too tight? Or does the necessity of such liquidity injections help to confirm that policy has been too tight?
5. October 2019 at 16:54
Scott: If we do have a recession, do you think it will be a shallow one? I feel like the Federal Reserve is more “prepared” in terms of understanding what has to be done than in 2008, and most other financial indicators indicate an otherwise healthy consumer and business.
Or is going to be like a Japanese type recession, where GDP contracts but unemployment remains steady, if not falling?
5. October 2019 at 16:55
Of course, Japan is special with negative population growth, so a fall in GDP does not directly mean recession in terms of employment.
5. October 2019 at 17:19
Scott—
I second Gordon’s question above. There has been a $180 billion increase in the Federal Reserve’s balance sheet. This is nearly equal to 4 months of quantitative easing, in the old days.
Also, pondering Federal Reserve policy, I think the role of the US central bank as a monetary superpower needs to be considered, that is David Beckworth’s observations.
I hope that the tools of quantitative easing and lower interest rates are enough to stimulate the US economy and keep labor markets “very tight” for several generations.
I suspect that developed nations will have to move to money-financed fiscal programs.
5. October 2019 at 18:16
Will, Yes, very slowly.
Gordon, These injections don’t change monetary policy, they merely accommodate an increased demand for reserves due to regulation. So no, they don’t address my concerns.
John, If we have a recession then unemployment will likely rise, but by much less than in 2008-09.
I’ve written a lot about mini-recessions. We’ve never had one in the US (at least since WWII), which is a major mystery. Indeed it is one of the most important unsolved problems in macroeconomics.
5. October 2019 at 19:30
@ssumner
Question: do you think rising government debt could cause a decline in demand for other assets (stocks, real estate, etc.)?
Also, what do you think of my post on Japan (all supply-side issues) here:
https://www.reddit.com/r/TheMotte/comments/dclpo3/understanding_1980s_american_worries_about_japan/
I wrote it explicitly in response to your complaints about 1980s complaints about the country’s economic impact, and to disentangle the issues that caused those complaints from other ones.
5. October 2019 at 21:28
“In contrast, I doubt I’ll live long enough to find out what happens to Hong Kong after 2047.”
Wow.
Scott is 63 and doubts he will live to 90 despite being only 73 in 2030 and the average life expectancy for a 63 year old American male already at 85?
Sumner really is unaware of what is happening around him in science and technology. Then again, Robin Hanson is one of a tiny number of economists I know or have read who really gets technology along with Erik Brynjolfsson and to some extent Russ Roberts, although even those three don’t seem to understand where medical technology is headed.
Sheesh, Sumner is as clueless about technology as Krugman and Cowen — and that’s a strong statement! (heh)
6. October 2019 at 01:49
Scott,
I don’t know what you mean by “slightly too contractionary”, but the real 30 year Treasury rate is only slightly positive and is nearly 150 basis points below last year’s high. A good case can be made that money is more than a little tight right now. Of course, I think it’s significantly worse than that, but don’t yet have an unambiguous empirical case for the latter claim.
If I understand your view correctly, you’re less concerned about the recent yield curve inversions, because you expected real growth to return to its lower potential after the initial boost provided by the recent tax cuts anyway, even sans expansion of the trade war. I think that’s another area of disagreement, though I think most economists had similar expectations.
6. October 2019 at 08:19
3.5% NGDP seems a pessimistic target. With 2% inflation, that is just 1.5% RGDP. We had 200 years of productivity growth of 1.5%. Are those days gone forever? Or, do we think workforce growth will stagnate? I’d rather see an NGDP target of 4.5%.
6. October 2019 at 10:15
DonG,
It hasn’t escaped my attention that after many deep, prolonged downturns, real factors were often overrated and productivity and RGDP potential, underrated.
6. October 2019 at 10:21
Harding, Agree that they have lots of supply side problems, including some of those you mentioned.
Todd, I’m 64, and I think I know more about my health prospects than you do. I don’t even want to live to 92.
Mike, I don’t see the 30-year bond yield as telling us much about current monetary policy.
Don, I expect roughly 1.5% RGDP growth as the norm going forward, until some breakthrough like AI leads to a higher rate. I believe it will be roughly 0.5% labor force and 15 productivity. I hope I’m wrong.
But this forecast was predicated on 1.8% inflation and 1.7% RGDP, as I expect slightly above trend growth during that year, before slowing to 1.5% thereafter.
6. October 2019 at 11:27
Economics
Draghi Says ECB Should Examine New Ideas Like MMT
By Fergal O’Brien—-Bloomberg
6. October 2019 at 11:30
Scott,
You don’t thinkt the 30 year real rate tells us much about current monetary policy. My point is that real rates are negative out to almost 30 years. Given that we have low inflation, and how much rates have dropped over the past year or so, and I think those are strong indicators money’s more than a little tight, even absent my a priori reasons for thinking monetary policy was tight, even before the trade wars.
6. October 2019 at 11:32
To be even more explicit, if the Fed were expected to offer enough stimulus to offset falling NGDP growth, we shouldn’t see long rates falling like that.
6. October 2019 at 12:37
“Todd, I’m 64, and I think I know more about my health prospects than you do. I don’t even want to live to 92.”
Obviously, I’m talking about a healthy 64 year old, and you wrote you doubted you will see 92, so you seem to think that there is a chance. The point is how the vast majority of social scientists, probably over 95%, assume that 2047 will look more or less like 2019 with of course better smart phones. There has been a complete disconnect between economists and medical science for the past 20 years and somehow we are supposed to take their projections out to 2040 and 2050 to set policies at all seriously.
6. October 2019 at 16:06
“That’s good, but what really matters is achieving America’s first ever soft landing (defined as 3 years of low and stable unemployment and stable prices.)”
What is your definition of low and stable unemployment and stable prices? Unemployment has been at or under 4.4% since March 2017. Why do we have to wait until late 2021 instead of March 2020?
6. October 2019 at 18:34
Scott:
What’s your take on this Econbrowser post by Menzie? (http://econbrowser.com/archives/2019/10/nominal-gdp-revisions) I don’t see how NGDP revisions are problematic for NGDP targeting because one is forward looking (based on market forecasts) and one is backward looking (NGDP revisions). Assuming the NGDP forecast is wrong, that will only guide the expected monetary policy and feedback to revision updates later, so am I missing anything here?
Thanks
7. October 2019 at 05:44
Thank you. I agree that the Fed is not too far behind the curve, but being overly cautious could result in the Fed “chasing” rates down to 0%. Signs of tight monetary policy didn’t really start until July. One more bold 0.5% cut should be all it takes to right the ship IMO- even one more 0.25% cut might do the trick…
7. October 2019 at 08:16
Ben, Draghi doesn’t know what MMT is. It’s not a “helicopter drop”.
Todd, Low rates are the rate once it stops falling. I’m assuming we are there now, as unemployment was 3.7% in September 2018. I may be wrong–it could fall below 3%.
LC, I don’t see that as a big problem, but I’ll take a look.
Brian, I agree.