The reckoning with inflation.

Many are tying the Democrat losses in the election to high inflation in recent years. There's some truth to that, but it's complicated, and it's crucial to take the right lessons.

My new 200th Sub-st@ck post: stayathomemacro.com/p/the-reckonin… There are many lessons to learn from the election, but I see a wrong lesson circulating that must be nipped in the bud. Here is an example from @BetseyStevenson, a professor of economics who served in the Obama Administration:

https://x.com/BetseyStevenson/status/1854879503102685396

""The US is not in a recession, despite the Sahm Rule indicator bearing my name saying that it is. That said, the risk of a recession is elevated, strengthening the case for the US Federal Reserve to cut interest rates.""
my @opinionbloomberg.com/opinion/articl… In saying no recession for July 2024 despite the Sahm rule, I am looking broadly at the data the NBER uses , not just the Sahm rule and unemployment rate. My assessment is that even after possible downward revisions it's not a contraction. Not not. fredaccount.stlouisfed.org/public/dashboa…

Comment:

"Why don’t economists ever talk about the fact that more and more workers at the lower end of the payscale have to work at more than one job to make a living? ... It seems to me that is a big reason why many don’t feel the economy is good right now."

Facts: Comment (continued):

"Workers have to work multiple jobs, far more hours than their parents worked, and still can’t save enough to buy a house like their parents and grandparents did. That should be a quantifiable statistic included in every news story."

Facts:

March 11: Past, present, and future.

Four years ago, the harsh reality of Covid hit the United States; the bottom fell out for millions of lives and livelihoods. We're in a far better place now, and where we are headed holds promise. Today’s post may start too heavy for some with its look back on four years ago at the start of the pandemic. It’s important because it gives us context for where we are now, but if it's too much, skip ahead to the sections on the present and future; they are more optimistic.

Labor shortages hit hard in 2021-2022, affecting business owners and customers with inflation.

How important were immigrants in getting us out of that mess? Very important. Covid was deeply disruptive. Millions left the labor force, and immigrants came back more quickly. That simple chart has so many things going on under the hood. But let's step back from the immigrant vs US-born debate, which often gets xenophobic.

Why did millions of people drop out of the labor force? They are not unemployed; they are not looking.

COVID!!!!!!!!

The "worst possible outcome" for the Fed is an unnecessary recession, not reversing a cut.

The Fed must decide when and how much to cut rates this year. Several Fed officials in recent weeks have said they will move slowly. What are they thinking? 🧵(long) draws on my new Stay-At-Home Macro (SAHM) Sub.st@ck post. (Google it). I explain why the Fed should cut the federal funds rate now and why they are unlikely to do so before May.

The FOMC’s next vote is on January 31.

“But many of reasons why lawmakers and voters have concerns about the size of the nation’s debt are misguided and undermine a constructive conversation about the priorities for the country.” My new @opinion piece on the deficit. bloomberg.com/opinion/articl… US federal government debt ended 2023 at a record $34 trillion. That created 'hair on fire' bipartisan commentary. It makes sense since almost 6 in 10 Americans say reducing it should be a top priority.

Lights on the runway for the soft landing.

The Fed faces tough decisions, geopolitics and commodity markets are a wild card, and it's an election year. There's a lot that could go wrong, thankfully, we have help in landing the plane softly. The thread is on today's Sub.st@ck post, so if you prefer a long form instead of a long Twitter thread, that's your place.

"Chair Jay Powell is not flying the plane [for soft landing], despite the popular narrative. He’s sitting in first class but giving the Fed credit means we could learn the wrong lessons." my piece at @MSNBC msnbc.com/opinion/msnbc-… What 2023 showed was that the ‘impossible’ was not only possible — which I have always argued — but is reality. We are not at the soft landing yet, but we are getting close.

“Extraordinary profits” due to temporary events like the huge disruption to oil supply after Putin’s invasion of Ukraine are well understood in economics. Firms pricing power increases so they raise prices. In a shareholder (or human) economy that’s not surprising but it’s greed.

https://twitter.com/briancalbrecht/status/1741942671915049113

Also, the reference to “primitive peoples” or anyone talking about pricing power as “ignorant” is offensive and counterproductive.

We can all see the runway, Jay Powell agrees. Soft landing is in the bag in 2024.

But make no mistake, Jay is not the pilot. This wild ride in inflation and jobs had little to do with the Fed. What did the Fed do?

- Updraft in 2020 (kept markets from crashing);
- Tailwind in 2021 (pushing for labor markets);
- Headwind in 2022-23 (slowing it down);
- Calm (largely) in 2024 (getting out of the way).

The Sahm rule: step by step.

Tomorrow is Job's Day, and we will learn what the unemployment rate was in November. So, it'll also be time to update the Sahm rule, my recession indicator. 🧵based on my Sub.st@ack post is a how-to on calculating the Sahm rule. It’s for anyone who wants to apply it themselves or apply the logic to other data.

Long-form on my Stay-At-Home Macro Sub.st@ack.

I was right.

https://twitter.com/thestalwart/status/1730740783190298713

I back it up. I pulled together my ‘top ten’ posts. Fiscal relief to families, workers, and small businesses was successful. There was no recession, and inflation is coming back down.

We are not out of the woods, but it’s clear that’s where we are headed. I told you all along.

Most Americans are better off financially now than before the pandemic. Full stop.

Jobs, paychecks, spending, wealth, and financial security have made big gains, offsetting the burden of higher inflation. That's true for most families. The good news goes far beyond the rich. Here are the facts:

- Millions more good jobs.

- Bigger paychecks, even after inflation.

- Consumer spending back on strong pre-Covid trend.

- Historic increases in wealth, including at the bottom.

- Lowest debt burdens on record.

That’s impossible. The vast majority of Americans are better off financially. Full stop.

https://twitter.com/jstein_wapo/status/1724072565746831824

I won’t tell people how to feel but when you ask them about their jobs, spending (after inflation), paychecks, bank accounts, debt payments, wealth, etc. they are better off. Democrat or Republican.

That’s what matters.

Sahm in Sahm rule here. 🧵

https://twitter.com/opinion/status/1721952132943765840

Alarm bells sounded Friday -- my phone blew up at 830am -- when we learned that the US unemployment rate rose to 3.9% for October, well above the 50-year low of 3.4% that it hit earlier in the year.

Sorry to be a broken record on this. But in 1970s/early 1980s:

a) inflation peaked 5 pp higher. elevated high longer.
b) stagflation paired with high unemployment rates.
c) gas went from very low to very high very fast.
d) Volcker Fed jacked up rates very high very fast.

https://twitter.com/elerianm/status/1721883623606104240

"one quick word" has gotten macro into trouble time and again.

gotten us this time on inflation:

a) we are in the 1970s again (no).
b) the Fed waiting to raise rates is a root cause.
c) big fiscal relief is a root cause.

b) and c) are somewhere in the mix but ...

.@greg_ip makes a useful point:

"A rule of thumb says when the unemployment rate rises half a percentage point, the economy ends up in a recession. Thus, its increase to 3.9% in October from 3.8% in September and April’s 3.4% low looks worrisome."
wsj.com/livecoverage/s… Greg is correct. 0.5 pp = 'in a recession' has floated around for a long time in the macro policy/forecasting world, including at the Fed/CEA. (I suspect that's the source in the private sector as Fed-sters leave and go there.)There are lower values like 0.3 pp for *forecasting.*

The Fed talks about being “cautious.” It must also apply that to its ability to judge the trend growth. It’s not time for a victory lap with inflation still too high, and it’s not time to pour cold water on the good news of recent growth. Recent economic news, with few exceptions, has been great. Eye-popping numbers like 300,000+ payrolls in September or what's likely to be over 3% real GDP growth in the 3rd quarter won't likely repeat. Even so, the labor market and growth look solid, and inflation is coming down.

**The SEP Strikes Back**

The Fed voted to hold the federal funds rate at 5.25% last week, but its Summary of Economic Projections (SEP), for which there's no vote, raised borrowing costs and upped the odds of a recession. “Don’t underestimate the Force.” ~ Darth Vader

Forward guidance is the Force of monetary policy; the Summary of Economic Projections (SEP) is one of its main tools. It's an approach the Fed uses to influence borrowing costs now by signaling what it will likely do in the future.

Americans are downbeat about the economy, even as inflation has come down a lot and unemployment is rock bottom low. But if you ask people (or tell them as economists like to do) ... they are not buying it. My piece asks why. Hint: it's not economics.
bloomberg.com/opinion/articl… The feed on here is full of economists bearing charts (I do this, too) to explain how much better things are now. And then their mentions are full of angry pushback. Here's an interview with @paulkrugman discussing the disconnect. See also his tweets. x.com/amanpour/statu…