FALLING EMPLOYMENT AND DEBT DEFLATION: TWO POSSIBLE PROBLEMS NOW AND BEYOND VALENTINE’S DAY DUE TO TIGHT MONETARY POLICY

Have you heard that when looking at employment estimates in the United States for January 2023 not on a seasonally adjusted basis, but rather based on the raw unadjusted data, employment in the U.S. fell in January 2023?  This is true regardless of whether we look at (1) the household survey data which is seen as being a ‘noisier’ series more subject to monthly randomness based on the households that happen to be surveyed, or (2) the establishment data, which is in part based on estimates of the number of new businesses created and the number of firms that unfortunately go out of business.

While CNBC, MSNBC, and others trumpeted the estimated gain of 517,000 jobs from the establishment survey conducted by the US Bureau of Labor Statistics ,and I have been told that at least one person noted ‘on air’ that the household survey showed even stronger growth, both of those were seasonally adjusted estimates.  Using seasonally adjusted numbers from the St. Louis Federal Reserve Bank FRED website, I estimate that the household survey announcement today (Friday, February 3, 2023) for January 2023 reflects an increase of nearly 900,000 jobs!  But, in terms of actual numbers, my calculations show that nonfarm payroll employment not seasonally adjusted fell by more than 2.5 million jobs, while the household survey shows a more modest decline of about 180,000 jobs.  Those are both job losses, not job gains!

In the early afternoon or the very late morning on CNBC today, Steve Liesman noted that Mark Zandi of Moody’s advised people on Twitter (@Markzandi) that they may be better off ignoring the data release, perhaps due to difficulty in making seasonal adjustments. Earlier on CNBC Jan Hatzius, Chief Economist at Goldman Sachs, noted that every January shows large numbers of net job losses, making it difficult to determine appropriate seasonal adjustments.  In fact, in a similar vein, if my memory is correct, then every first quarter shows a loss of real GDP given that holiday shopping is so strong in November and December at the end of the previous year.  So, maybe this means that the job market in January was bad – but just not as bad as it usually is in January?!

Combined with the release last week on January 25 stating that in the second quarter of 2022, U.S. employment may have fallen by about 273,000 jobs, do these findings suggest that the U.S. job market may be softening?  If so, then did the Federal Open Market Committee (FOMC) of the Federal Reserve Bank (the Fed) consider that when raising its target for the federal funds rate?  My earlier blog post (short title “Will Food for Thought Feed the Fed”, see internet address in the References and Additional Reading section below) noted that I would have preferred that the FOMC would have kept the federal funds rate unchanged to wait for further information before making a change. 

I am concerned that both the Fed and the U.S. Bureau of Economic Analysis (BEA) may place too much emphasis on the seasonally adjusted estimates and not enough emphasis on the estimates not seasonally adjusted and also not enough emphasis on the January 25 revisions from the BLS.  The BEA may rely on the seasonally adjusted estimates for employment in estimating the growth of first quarter real GDP in 2023 in the U.S.  But what if some of the decrease in actual jobs in the US economy in January 2023 is not due only to seasonal factors but due to an economic downturn?  The BEA may not detect this as soon as possible if it relies too much on the seasonally adjusted estimates.  Regardless of what the BEA does, tighter monetary policy could very easily lead to a recession with a loss of jobs and real GDP by making it harder to borrow funds and by taking money out of the economy, discouraging consumption by households and investment in physical capital by businesses.

Another concern that I have about the approach by the FOMC in reducing inflation in the United States deals with the emphasis on calculating inflation based on a measure of the price level in the most recent period compared with one year ago or even six months ago rather than compared with the most recent month or quarter.  Wharton School University of Pennsylvania Professor Jeremy Siegel and likely others have noted that at least some measures of US inflation measured month to month have gone negative, implying that on average, those weighted averages of prices in the US economy have started to fall.  The US economy may have a situation now where some prices in the economy have fallen in recent months but still could be higher than they were a year ago or six months ago.

A potential problem with the FOMC focusing on inflation data with inflation calculated based on prices six months ago or twelve months ago is that in order for the FOMC to reach its stated target of two per cent on a ‘year over year’ basis, given that inflation has been noticeably higher than two per cent, weighted averages of prices must decrease in the short term more than they have already.  This could lead to a problem known in economics as debt deflation. 

Wages and salaries may drop as part of the deflation.  When borrowers have fixed nominal interest rate loans and prices in the economy drop, the borrowers have a greater sacrifice of purchasing power required to repay loans.  In the case of the US for example, borrowers have to repay loans in dollars worth more in buying power than they anticipated (unless they were expecting a level of deflation at least as large as the one consistent with the level of deflation in the economy).  Further, borrowers’ wages and salaries may fall, yet with fixed nominal interest rate loans, they may not get a break in terms of the nominal amount that they must pay when they repay loans.  With price levels in the economy falling but fixed interest rate loan repayments remaining unchanged, inflation-adjusted or real loan repayments go up.

Because borrowers may reduce their spending to repay loans more than lenders increase their spending as they are repaid (for example, see Krugman and Wells (2009, p. 463)), real GDP would almost certainly be lost, and unemployment would almost surely rise.  In addition to the greater hardship associated with repaying because incomes may be falling, borrowers would have a greater strategic incentive to default than without deflation due to the need to give up more purchasing power to repay loans, so that a financial crisis could arise due to a surge in defaults.  Given that credit card debt may already be at record-setting levels and delinquencies may be surging, would the economy be better off with the FOMC of the Fed switching to more of a ‘wait and see’ approach rather than its relatively new fixation on reducing inflation, especially when inflation may already be falling?

We can hope that the US job market is as strong as the seasonally adjusted estimates imply.  However, my concern is that with millions of households struggling to pay bills, unfortunately actual labor market conditions and tight monetary policy may have many broken hearted before, on, and after Valentine’s Day.

 

Readers may enjoy an earlier blog post that I wrote dealing at least in part with the household employment estimates versus the establishment survey and seasonally adjusted data versus data not seasonally adjusted.  A short title could be “Is a Temporary Dichotomy Emerging Between…” and a website address for this entry can be found in the References and Additional Reading section below.

Please note that subsequent data revisions may change the analysis in the blog entry above, and that data were accessed from the FRED website of the St. Louis Federal Reserve Bank.  Constructive comments are welcome at my Twitter account (@HarrisonCHartm1).  Also, please accept my apology for any misstatements, inconvenience, and/or confusion.

 

 

REFERENCES AND ADDITIONAL READING

Hartman, H. C.  (2020)  “Is a Temporary Dichotomy Emerging Between Establishment Data and Household Data Regarding U.S. Employment?”  March 7, 2020, available online at https://harrisonhartman.blogspot.com/2020/03/is-temporary-dichotomy-emerging-between.html

Hartman, H. C.  (2023)  “Will Food for Thought Feed the Fed While People Try to Feed Their Families?”  January 29, 2023, available online at https://harrisonhartman.blogspot.com/2023/01/will-food-for-thought-feed-fed-while.html

Krugman, P. and Wells, R.  (2009) Macroeconomics, 2^nd edition,  New York, New York, Worth Publishing, p. 463.

Tweets of Mark Zandi (@Markzandi), February 3, 2023.

U.S. Bureau of Labor Statistics, Employment Level [LNU02000000], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNU02000000, February 3, 2023.

U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYNSA, February 3, 2023.

U.S. Bureau of Labor Statistics, Employment Level [CE16OV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CE16OV, February 3, 2023.

U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYEMS, February 3, 2023.