Thursday's Market Minute: The Missing Piece to Three Macro Riddles

(Continued from Wednesday's Minute)

Between stimulus-supported income that in many cases exceeded hourly work rates pre-pandemic, and monetary support for markets that rewarded speculators in stocks to crypto with dot-com shattering valuations, COVID created a profound window into a future of a labor-free economy.

For the first time ever, incomes rose during a technical recession and alongside higher unemployment. That has probably reversed the osmosis between policy and employment such that tighter financial conditions actually lead to job gains instead of losses. If this is true, that employment is strong because of – instead of in spite of – tighter policy, it weaves a compelling thread between the three biggest macroeconomic riddles today. 

Here's what I hear people puzzling over the most:

1) How can we have a “recession” if the labor market is so strong?

2) Why is consumer sentiment so sour despite 11 million job openings?

3) Why is good data bad for stocks?

The first one is kinda easy. Not to beat a dead horse, but the “old” definition of recession as slowing GDP is effective because the point of the label is to describe if things are getting better or worse. Static definitions and nominal thresholds don’t work when the economy does not have some steady state – it’s always changing, and generally improving. GDP slowed after the COVID bounce-back as fiscal and monetary support unwound, stocks crashed, and incomes declined from their COVID peak. The financial situation for many deteriorated and now they’re reentering the workforce. There are plenty of decent, paying jobs, so the current situation may not be “bad,” but for many, it’s worse.

Combined with inflation, that pretty much answers the second riddle. The University of Michigan Consumer Sentiment survey is near the lowest reading ever, a powerful indication of just how favorable the COVID economy was for many. People assess their quality of life as a rate of change, and it’s hard to beat record savings and income as well as the financial self-sufficiency that many were able to enjoy when Stocks Only Went Up. Now, there are 11 million jobs to choose from, but they require more hours of labor to match what people had just a year ago.

As I wrote nearly three years ago, America played God in the second quarter of 2020. We didn’t just soften the blow of “recession,” we flipped it on its head. It makes sense then that the relationship between output and employment may be inverted for the moment. The stock market is already inverted, trading negatively when good labor data come out. That’s because the stronger data represent our separation from the COVID Boom Times. 

Eventually, the relationship between jobs and the economy should revert back to something more normal; we’ll know when stocks actually respond positively to good data again. Until then, Powell and anyone else that relies too heavily on employment data are likely to be off-target in achieving their goals.

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