“The Jobs Report No One Saw Coming”

Here is today’s FT headline:

The jobs report no one saw coming

Actually, one person did see this coming. Here’s what I wrote three weeks ago:

Because millions of unemployed workers in low pay service sector jobs earn more on unemployment than they did on their previous jobs, and because most of those jobs are unpleasant, employment will likely remain quite depressed all summer, before bouncing back in the fall. That’s not to say the economy won’t grow.  The end of Covid makes it likely that sectors such as travel will pick up, but the quality of service will be lousy, perhaps the worst of my entire life.

Here’s the FT:

Knightley does pick up on the important trend that employers are struggling to find workers: . . .

This, he tells us, means there is huge demand for workers, but job gains will be held back in the next few months because of a lack of supply.

The reason for that is two fold in Knightley’s opinion: childcare issues and benefit incentives.

Most economists don’t understand supply side economics, and hence most never saw this coming.

PS. I’m on vacation, experiencing some of that lousy service that I predicted.


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42 Responses to ““The Jobs Report No One Saw Coming””

  1. Gravatar of Todd Kreider Todd Kreider
    7. May 2021 at 10:35

    Considering there are almost two months until summer starts and half a year until it is known what unemployment is for early fall, aren’t you being a tad premature in claiming prescience?

  2. Gravatar of ssumner ssumner
    7. May 2021 at 10:43

    I didn’t claim prescience about the summer, I claimed that someone saw this jobs report coming. The FT says no one saw it coming.

  3. Gravatar of Mark Z Mark Z
    7. May 2021 at 11:08

    Without a sense of irony, the president cited the weak jobs report as evidence of the need for more fiscal stimulus, in the very same speech in which he denied that unemployment benefits deterred people from re-entering the labor force. As ever the preferred ‘solution’ is, as Arnold Kling would say, “restrict supply, subsidize demand.”

  4. Gravatar of John Hall John Hall
    7. May 2021 at 11:25

    Interesting how much equities went up. Yields fell at same time.

  5. Gravatar of Gene Frenkle Gene Frenkle
    7. May 2021 at 11:48

    I was banned by a Keynesian blogger for pointing out that the Obama “stimulus” lasted too long and kept people out of the job market with extended unemployment benefits and expanded SNAP. The good news is Larry Summers apparently noticed what was going on in 2011-2013 and he probably has the ear of Biden.

  6. Gravatar of Todd Kreider Todd Kreider
    7. May 2021 at 12:55

    This part: “… employment will likely remain quite depressed all summer, before bouncing back in the fall.”

  7. Gravatar of Michael Sandifer Michael Sandifer
    7. May 2021 at 14:14

    Good prediction, and simple. And you’re so right about so many economists failing to understand the supply side. The constant “reasoning from a price change” problem we see from even many Nobel winners illustrates this.

  8. Gravatar of Michael Sandifer Michael Sandifer
    7. May 2021 at 14:24

    This is another example of why I hesitate to disagree with Scott about economics, yet sometimes I do, even in some big ways. However, my meta-perspective is that he’s likely correct, when we disagree, because he he’s very strong on the fundamentals and typically knows the data well. This must have made him an ideal teacher in many ways, and some of us never want to let him retire from teaching.

    That said, market monetarism is not the future of economics, but rather the application of sound established theory and past data. It is largely the ignored present state of the art, to the degree any such thing is recognized at all.

    I think the future is more in the directions I’m stumbling and bumbling into, on which models will be much more precise and the importance of publishing refereed papers will diminish in favor of economists developing software solutions based on their research that more readily demonstrates the utility of the research than any paper could.

  9. Gravatar of Michael Sandifer Michael Sandifer
    7. May 2021 at 14:33

    To provide one example, the fact that market monetarists have been so surprised by the relationship between the S&P 500 earnings yield and NGDP growth, for example, and the significance of this relationship is telling. It doesn’t seem any of them, apparently, studied stock indexes closely, or their relationship to economic growth. There is confidence among market monetarists about the ability of the stock market to signal important information about changes in NGDP growth, but I doubt anybody them I’m familiar with even realized that the earnings yield is essentially the same as the discount rate, and hence miss the importance of the PE ratio. That is, changes in the earnings yield/P/E ratio very precisely reflect changes in the future expected path of NGDP growth.

    And then there is the proposed relationship between economic growth rates and nominal interest rates in monetary equilibrium, which is much more controversial…

  10. Gravatar of Ray Lopez Ray Lopez
    7. May 2021 at 17:49

    Sumner calls out the headline writer for FT (which is different from the writer of the article) and claims nobody saw the obvious that people cling to unemployment insurance until it runs out, a classic case of moral hazard. Maybe Sumner, now that he’s in the 10% and retired, is abandoning his liberal Boston Brahmin ways in favor of traditional right-wing Orange County politics? It’s a day late and a dollar short.

  11. Gravatar of ssumner ssumner
    7. May 2021 at 21:29

    Todd, Still struggling with reading comprehension?

    Michael, You said:

    “To provide one example, the fact that market monetarists have been so surprised by the relationship between the S&P 500 earnings yield and NGDP growth, for example, and the significance of this relationship is telling.”

    For it to surprise me I’d first have to accept that it is true.

  12. Gravatar of J. V. Dubois J. V. Dubois
    7. May 2021 at 23:00

    While young people have want a nice summer, it will come at a cost of higher debt. So it will be young people footing the whole bill for saving old people in both ways: human costs of a year lost and all the social ailments lockdowns have caused as well as financial costs related with everything.

    As far as I see it the baby boomers in the West seem to be the luckiest out there. Their parents sacrificed their lives in WW2 and post-war reconstruction so boomers have a good life. And their children and grandchildren stopped their lives for a year so boomers will live a little longer.

  13. Gravatar of rinat rinat
    8. May 2021 at 03:56

    “I think the future is more in the directions I’m stumbling and bumbling into, on which models will be much more precise and the importance of publishing refereed papers will diminish in favor of economists developing software solutions based on their research that more readily demonstrates the utility of the research than any paper could.”

    – Have you ever considered a course in grammar? Perhaps one that teaches comma usage?

    To think that you could create a prediction model is incredibly arrogant. Hundreds of Hedge Funds have attempted to create these quantitative models, risking millions in development, and have yet to beat the market with any consistency. Those guys are a 100x smarter than you! Not to mention, Marx and Mao tried planning & predicting with a cohort of geniuses – 100M are now dead!

    The best thing an “economist” can do is to get out of the way. You are sitting on the bench and observing the game. You are teaching five classes a week, mostly to morons who are barely literate, and you may read about 5 books a month – but probably not. The entrepreneur works 18 hours a day and reads 200 books a year. You are barely capable of hanging out in the same ballpark. So take notes on the bench, collect and analyze the data, make a few recommendations from observation, but then get out of the entrepreneurs way!

    The more you involve yourself, the more tyrannical the public and private sector become.

  14. Gravatar of Michael Rulle Michael Rulle
    8. May 2021 at 04:29

    One of my lovely children was on welfare for a year——-from me——and like many parents, I was both irritated but suckered. By some miracle of good fortune, we communicate easily with each other——and she knew the end was near. But literally, as I was about to lay the hammer down she had already landed a job with a real estate insurance start-up. And had not mentioned to me until I suggested we “have lunch”.

    But everyone knows this——we are all inclined to take a “free lunch”. I know I beat a dead horse with Scott on this point——but when he criticized Trump——as economy did well and employment did better, he was ruthless in his hatred.

    Yet, as he brags (it’s okay to brag) about his foresight he somehow cannot name names on the left. It’s okay—-I obsess on this——but I do not understand it. And, please, no one bring up “insurrections”.

  15. Gravatar of Lizard Man Lizard Man
    8. May 2021 at 05:02

    Is this of any importance? Is it all merely transitory? How many of those boomers have actually left the workforce for good? How many people are currently receiving unemployment? What’s wage growth look like? Unless I had a good grasp on those numbers, I wouldn’t be especially confident that I had much insight into the future path of employment. Employers might believe that the unemployment is causing their difficulties in finding employees, but they could be wrong about that if it is the case that a large number of people have left the workforce permanently. And if they wait and don’t raise wages because they think that workers are going to come back but workers don’t, it could be that employment growth remains slow into the fall due to insufficiently high wages to draw enough people back into the labor pool, and excessive reluctance on the part of employers to start hiring people whom they normally wouldn’t, like ex-cons.

  16. Gravatar of ssumner ssumner
    8. May 2021 at 07:38

    JV. Good points. But I seem to recall young people “protecting” old people in the Vietnam War.

    Michael, OK, I’ll name names. Trump created the UI program that pays people more to stay home than to work. Happy now?

    Lizard, Well, I was also right and the Keynesians were wrong about the jobs surge after extended UI ended in 2014, so there’s that.

  17. Gravatar of Todd Kreider Todd Kreider
    8. May 2021 at 07:56

    Scott: “Todd, Still struggling with reading comprehension?”

    You wrote: “employment will likely remain quite depressed all summer, before bouncing back in the fall.”

    Here in Wisconsin, it is still spring and summer will start around June 21st and last through September 21st. I didn’t realize you Californians have a post modern definition of summer but should have guessed.

  18. Gravatar of Michael Rulle Michael Rulle
    8. May 2021 at 08:35

    Scott—-I am looking forward to your return—-seriously—-there is a lot of talk about inflation coming our way—although it does not show up in PCE or Dallas Fed “trimmed” numbers.

    Equity prices are rising–but bond prices are falling–or have negative to zero returns. For example, if one equally risk weights (i.e.risk parity) equities and fixed income—-we have had negative returns—and risk parity weights fixed income/equity very close to the nominal ratio of fixed income to equities outstanding.

    Breakeven inflation “forecasts” are within Powells range. Housing is rising—but that is in PCE and Dallas trimmed (unless housing was “trimmed out”).

    However, S&P GSCI is up 93% over trailing 12 months. Even when one equally risk weights commodities it is up virtually the same. Yet, we know they make their way into PCE too.

    Look forward to your views. I do not think we will have inflation outside Powell targets—but I would rather know your view.

    Yet, the inflation fear is near—Imagine if Powell Tightened? Nightmare.

  19. Gravatar of David S David S
    8. May 2021 at 11:16

    Scott,

    I’m sorry if your vacation is plagued by bad service, but don’t feel like you should take the time to respond to trolls like me. I’m conceding you were right about the relationship between UI and reluctant workers. Things will get even more interesting as the summer progresses—fortunately, I have low standards and don’t travel much.

    I’m still hoping that wage pressure forces a reckoning for the crappiest of American employers. Subway has no business serving food to anyone at any price point.

    And, I’m doubling down on my prediction for a rate hike within the next 6 months—merely as a signal, regardless if PCE is only in the mid 2’s. I refuse to make any predictions about 2022 except that Kevin McCarthy will be the next Speaker of the House.

  20. Gravatar of Paul Bogle Paul Bogle
    8. May 2021 at 13:00

    “Michael, OK, I’ll name names. Trump created the UI program that pays people more to stay home than to work. Happy now?”

    Funny…..I remember this critter rampaging the land when Joe was VP and Trump was screaming about loose monetary policy while the nation was recovering from a financial crisis.

  21. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. May 2021 at 07:04

    The economy falls off sharply beginning in August.

  22. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    9. May 2021 at 08:45

    What the last half of 2021 represents is stagflation, inflation doesn’t subside but real output falls.

  23. Gravatar of ssumner ssumner
    9. May 2021 at 08:49

    Todd, You said:

    “You wrote: “employment will likely remain quite depressed all summer, before bouncing back in the fall.”

    I wrote that weeks ago, and you’ll notice that in this post I did not take credit for that specific prediction being correct. Oh wait, you didn’t notice.

    David, I like Subway. A world without Subway would be a very sad place.

    Paul, There was a UI program that paid people more not to work when Biden was VP. Who knew?

  24. Gravatar of Paul Bogler Paul Bogler
    9. May 2021 at 10:33

    “Paul, There was a UI program that paid people more not to work when Biden was VP. Who knew?”

    I didn’t know Trump created it. Perhaps he conjured it up while chasing down Obama’s birth certificate.

    Thanks for setting the record straight.

  25. Gravatar of Daniel Kling Daniel Kling
    9. May 2021 at 16:16

    Paul, I think the point you’re dancing around (and missing) is that in 2009+ congress extended eligibility for unemployment benefits so that people could keep collecting (for up to almost 2 years if I recall). There were some boosts even (maybe just for parents?), but it wasn’t structured to actually pay people more for not working than they got for working. So it was definitely a disincentive to take a job that you’re not enthusiastic about, but it wasn’t like you’d earn less money by going back to work full time.

  26. Gravatar of Michael Sandifer Michael Sandifer
    9. May 2021 at 19:41

    Scott,

    You don’t think the changes in the expected NGDP growth path are reliably reflected in the S&P 500 earnings yield?

  27. Gravatar of Michael Rulle Michael Rulle
    10. May 2021 at 03:37

    I am more interested in inflation than jobs predictions, for now at least—–given this is a monetary policy site. I purchased a 2 year old SUV 1 month ago—at a “good deal” price according to CarGurus. Carvana, last Monday, was willing to BUY it from me at 12% higher. So the wholesale Bid is now 12% higher than the Retail Ask just 1 month later—which made today’s WSJ online’s lead story about used car prices more interesting–to me at least. Used cars like used houses are not part of GDP (except profit, sales commission etc)—but are part of CPI. Supply side shortage is the claim—-makes sense—but is it right? Don’t know of course.

  28. Gravatar of Michael Rulle Michael Rulle
    10. May 2021 at 04:06

    Scott’s essay raises another point—-if we have a supply-side shortage of workers—due to subsidies by the Govt.—shouldn’t we see a hike in pay? Sticky is sticky—-but what is the delay period? Since Powell seemed supportive (don’t really know–I just read the WSJ) of the new proposals—won’t that mean he will respond to inflationary pressures at some point? I am glad he went AIT—-but still—-if Scott is right-then Powell was wrong to support the new bills. Maybe he has his own games he needs to play. The 5 year breakeven is 2.66—which plausibly fits Powell’s AIT target zone—-although he has not really been specific as to time frames of AIT–

    But the problem is the B/E rate has been going straight up—this year it is up 71bp. Need to watch.

    I will make a prediction—if he tightens we are screwed.

  29. Gravatar of Michael Sandifer Michael Sandifer
    10. May 2021 at 05:11

    It seems that short-run inflation occurs to the degree wages aren’t sticky, which makes sense. I’m increasingly convinced that prices that make up the PCE less food and energy inflation rate are sticky, because wages are sticky. I’m skeptical of the need for separate explanations for such non-wage sticky prices.

  30. Gravatar of bb bb
    10. May 2021 at 05:48

    @David, Scott,
    Subway is bad. Makes me question Scott’s judgement on other topics. SMH

  31. Gravatar of JHE JHE
    10. May 2021 at 05:54

    “But everyone knows this——we are all inclined to take a “free lunch”. I know I beat a dead horse with Scott on this point——but when he criticized Trump——as economy did well and employment did better, he was ruthless in his hatred.

    Yet, as he brags (it’s okay to brag) about his foresight he somehow cannot name names on the left. It’s okay—-I obsess on this——but I do not understand it. And, please, no one bring up “insurrections”.”

    Whatever your desire to put your hands in your ears on “insurrections,” Trump was literally trying to replace democracy as its understood in successful countries where candidates vie for office according to a set of rules and the person (people) who get the most votes under the rules win, with democracy as it is understood in banana republics…the candidate who can strong-arm the courts/vote counters wins, regardless of the actual election results. Scott denounced Trump for his atrocious personal character throughout Trump’s first term and was proven completely right when Trump behaved in a sinister manner after losing the election.*

    *To anticipate the inevitable whataboutism on “overturning the election”, spare me the comparisons to Al Gore (lost by 500 votes in a single decisive state, vs. Trump needing to make up 10,000, 10,000 and 20,000), the recent Iowa House election race (the Democrat lost by literally *six* votes), etc;

  32. Gravatar of ssumner ssumner
    10. May 2021 at 08:22

    Paul, It’s always sad to see someone trying to be a troll, and not knowing how to do it right.

    Michael Sandifer, No.

    Michael Rulle, I expect a brief spike in inflation.

    JHE, Yes, Michael Rulle thinks that Trump’s attempt to abolish democracy in America was just a minor personality flaw. If people don’t want to see the truth, you can’t force them.

  33. Gravatar of Bob Bob
    10. May 2021 at 10:48

    And how much of the dearth of homes for sale comes from the foreclosure moratoriums / bans on evictions?

  34. Gravatar of Lizard Man Lizard Man
    10. May 2021 at 18:08

    “ Lizard, Well, I was also right and the Keynesians were wrong about the jobs surge after extended UI ended in 2014, so there’s that.”

    TLDR: I think that employment patterns following the expiration of extended and enhanced unemployment benefits will not follow the pattern seen in 2014. The pandemic will continue to depress labor force participation in multiple ways even after a very large percentage of the population has been vaccinated. I do think that labor force participation and employment will pick up in the fall, but perhaps not as dramatically as Sumner seems to be expecting, and that the pickup will be localized to places that go back to in-person schooling at that time.

    I think that 2021 is quite different than 2014. Pew research indicated that in the year leading up to and inclusive of Q3 of 2020, 3.2 million additional baby boomers said that they were not employed due to retirement. This is 1.2 million more than in most of the last 10 years, when the average has been around 2 million.

    I have so far been able to find reliable numbers on how many women are now out of the labor force due to childcare. I wouldn’t be surprised if that number is between 500,000 to 1 million people. A lot of those people will start looking for jobs when schools reopen in the fall, but there will still probably be some places that don’t reopen schools even then. Also, childcare for pre-k aged children will likely take quite a while to come back. Many facilities have closed, and will not reopen. If the normal laws of supply and demand hold, fewer places in preschool will mean higher prices for parents to pay. That will then impact the decision to work or not to work for a lot of parents, with a lot more parents doing the math and realizing that they are financially better off not working, even after unemployment runs out.

    And then there are the people who will have become functionally unemployable due to persistent symptoms of the coronavirus. Close to 30 million people in the US have had the disease. I have seen doctors quoted as estimating that 3% of people who catch the virus will have persistent symptoms. So let’s just ballpark that around 1 million to make the math easier. How many of those folks that have persistent symptoms will leave the labor force for good, or at least for a long time? Maybe a lot of those people are among the boomers who have retired since the start of the pandemic. I would guess that this number is immaterial for the national labor pool, but that is merely a guess.

    Another factor to consider is drinking, drug use, and overdoses. All are up since the start of the pandemic, though I don’t have enough information to even make a back of the envelope guesstimate on how that will impact labor force participation going forward. I mean, I think that it will negatively impact labor force participation going forward, but I don’t know if it will be by a material amount.

    Somewhat relatedly, how will the mental health impacts of the pandemic impact the labor force? Again, the likeliest outcome is to depress employment and labor force participation, but I have no idea by how much.

    https://www.pewresearch.org/fact-tank/2020/11/09/the-pace-of-boomer-retirements-has-accelerated-in-the-past-year/

    https://www.npr.org/sections/health-shots/2021/02/22/966291447/when-does-covid-19-become-a-disability-long-haulers-push-for-answers-and-benefit

    https://nypost.com/2021/02/18/alarming-alcohol-abuse-rising-under-covid-19-lockdown-study/

    https://www.apa.org/monitor/2021/03/substance-use-pandemic

  35. Gravatar of Michael Sandifer Michael Sandifer
    11. May 2021 at 06:25

    Scott,

    Okay, so you don’t think the changes in the expected NGDP growth path are reliably reflected in the S&P 500 earnings yield. Is it this particular metric you question, or the broader approach?

  36. Gravatar of ssumner ssumner
    11. May 2021 at 08:06

    Lizard, You said:

    “but perhaps not as dramatically as Sumner seems to be expecting, and that the pickup will be localized to places that go back to in-person schooling at that time.”

    We aren’t far apart. I agree that if schools stay closed then that will depress labor force participation. But won’t they reopen?

    Michael, I don’t know what “reliably reflected” even means.

    Perfectly correlated? No.

    Somewhat correlated? Yes.

  37. Gravatar of Justin Justin
    11. May 2021 at 08:35

    What on earth is going on with TIPS spreads?

    computed 2.71% on the 5-year with Bloomberg data this morning…confirmed on FRED

    https://fred.stlouisfed.org/series/T5YIE

    Could we really be at the dawn of a new epoch at the Fed where they have a symmetrical inflation policy? I generally know better than to question markets…but the FOMC is going to endure ~2.5% YoY PCE-core readings for 5 years? No way…right?

    Big trading implications if markets really are temporarily inefficient.

  38. Gravatar of Lizard Man Lizard Man
    11. May 2021 at 08:40

    @Justin

    What is the implied price level for 2026 relative to 2016? Does it average out to a 2% increase per year? What’s going on with 10 year bonds? Does that also reflect a rise in the price level of 1.02^10 over those years?

  39. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    11. May 2021 at 09:02

    DJIA down 625. Like I said, May is the top. Like I said, inflation won’t subside until Feb. 2022 (like BofA’s forecast).

    Economics is simple. Banks don’t loan out deposits. Deposits are the result of lending. The solution is to drive the banks out of the savings business.

  40. Gravatar of Michael Rulle Michael Rulle
    11. May 2021 at 10:20

    Whether I liked Trump or not is irrelevant. You guys keep bringing it up. He is gone. We have new clowns in town and that’s who I care about, but I seem to be the only one here who think they matter.

    Re: Scott’s comment on inflation. That is worrisome

  41. Gravatar of Justin Justin
    11. May 2021 at 10:59

    @Lizard Person: Not quite motivated to run the calculations, but I figure it works out to something pretty close to the 2% PCE-core target. My point is, we had the de facto 2% PCE-core rate ceiling in the years following 2009. YoY PCE-core inflation would pop above 2% for a few months, and then the Fed would dampen NGDPE, sending measured inflation lower. Moving from the regime of 2% ceiling, to 2% average, results in, cumulatively, trillions in extra output over the years, and justifies the current S&P 500 run. (Probably also brings in a nice amount of totally inflation-driven capital gains taxes, but that’s another conversation). It’s a huge development, and hard to see the Fed actually sticking to, and yet the market is convinced.

  42. Gravatar of Michael Sandifer Michael Sandifer
    12. May 2021 at 20:22

    Scott,

    I’m increasingly convinced that the S&P 500 earnings yield should equal the NGDP growth rate, in monetary equilibrium. In fact, since 1962, the average values of those metrics are only separated by .2%, and only .5% since 1948, and they vary exactly as one would expect if my claim were correct, and it’s also consistent with changes in interest rate yield curves, etc.

    Now, if you accept that, you accept that the NGDP growth rate is the S&P 500 discount rate, in equilibrium. This is seen clearly just by playing with the S&P 500 integral equation that relates earnings and the discount rate, if you use average earnings. But, that means that the Treasury yield also has to match the NGDP growth rate and S&P 500 discount rate in equilibrium, otherwise the discount rate for the S&P 500 would have to differ from the NGDP growth rate. And, in fact, during the Great Moderation, which I estimate as running from 1983 to 1999, the average NGDP growth rate was 6.4%, the average S&P 500 earnings yield was 6.2%, and the average one year Treasury yield was 6.6%.

    Is this all coincidence? Maybe. But, how likely is that?

    And the implication of the above view for monetary policy in recent years is that it’s remained tight, even after 2017. This view predicted that unemployment would continue to fall below the level most economists thought was the NAIRU, which occurred. It is also consistent with the spike in the S&P 500 earnings yield and the much higher Treasury yield curve in 2009 that then began a very sharp decline during 2010.

    I think this is a problem for market monetarists who claim that low real economic growth since 2015 or so mostly reflects real factors. If real factors like demographics and shifts to service sector jobs are primarily responsible for the slow growth, why the sudden change after the recovery to the Great Recession began? Why so sharp?

    And I wouldn’t bring up how productivity growth began falling in 2004, because this was coincident with an oil shock that began a year or two prior, and continued to cause problems right up until the Great Recession and after.

    So, yes, real factors were a problem, and some of them were even demographic, but it was much more due to unexpected commodity shortages, but mostly due to tight monetary policy.

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