What the 33,000 job loss means about where the US economy is right now
The latest jobs number out of the US was a loss of 33,000 jobs in a hurricane-ravaged September. Despite the job losses, the unemployment rate ticked down to 4.2%. Viewed narrowly, this number puts the Fed on hold until December. But viewed more broadly, I believe now is the time to talk about Minsky’s ‘instability of stability’ and what it means for the economy going forward.
First, looking at the numbers narrowly, the job loss is not horrible. Last month, I wrote that we should expect some gyrations on the jobs front. And we have seen elevated jobless claims since then.
But while I am not worried yet, even last week’s figure was elevated relative to the average in the 240,000 to 250,000 range over the past year. And so the impact of the natural disasters on the third quarter growth numbers is going to be pretty sizable – larger than initially expected.
The way to think about this is as lost income that pulls down GDP growth numbers, as people having less money to spend due to job loss. If that job loss increase is large enough and sustained enough, it can lead to recession.
In the past, an increase of 50,000 in average jobless claims or a decrease in payrolls for three consecutive months was enough of a economic shock to indicate recession. The second post I wrote on Credit Writedowns in March 2008 predicted that we began recession in December 2007 or January 2008 because of the job loss numbers. By December, this was confirmed.
But things simply don’t look like that right now. These numbers are skewed by the storm and don’t tell us anything about employment trends. They can be dismissed out of hand by policymakers. The Fed is widely expected to stand pat until December. These numbers will not change that.
As an aside, I want to point out that jobs data are also good at highlighting upturns as well. See my April 2009 post, “Are jobless claims peaking?”, which coincided with the upturn in the US economy as an example. To my mind, the claims series is the best real-time data set we have. And despite the recent uptick, the numbers have already receded enough to predict continued economic growth for the US.
And – with US 10-year bond yields now at 2.4% and the dollar index up for the fourth week on the trot, the natural question becomes: What next?
The way I parse that question: “what next?” is by asking “what are the fingers of instability and when will they matter?” Let me tell you why.
The late Hyman Minsky wrote about “The Financial Instability Hypothesis” back in 1992. The paper is online here. And because his framework was so prescient and so well-cited during the financial crisis, I think we need to examine the data today with his theories in mind. Here’s the part from the 1992 piece I would hone in on:
The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.
In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.
Translation: Good times breed complacency, which automatically results in more risk-taking. Eventually, speculation is so rampant that any attempt to tamp down on it ends up crashing the system as over-extended speculators try to get liquid.
By the way, this explanation is totally consistent with the way Austrian economist Ludwig von Mises described things during the Great Depression. The key here is to understand that there is always going to be some level of speculative finance going on that could be disrupted by tighter financial conditions. The questions are: 1. how much speculation has occurred? 2. Are financial conditions tightening enough to destabilize asset values in speculative areas and 3. If asset values do drop, will the hiccup in prices contaminate other sectors of the economy, causing asset values to fall elsewhere
Let me give you three examples from the US on this. First, think about the commercial property bubbles in Boston or New York from the late 1980s. This created a lot of carnage as prices plummeted in the early 1990s. I remember looking through a New York high rise rental property book in the late 1990s that showed buildings with date of construction and noticing not a single building from the early to mid-1990s. (The same was true for the early to mid-1980s.) That’s how dire the financial conditions were. Donald Trump was a major casualty of this downturn.
A lot of this carnage was because of so-called Ponzi finance – meaning projects that were dependent on rising prices to be self-financing. But outside of a few metro areas like Boston or New York or San Diego, large swathes of the US were not severely impacted. There was a recession that began in 1990. Citibank almost went under and had to be rescued by equity from Prince Alwaleed. But there wasn’t mass-scale contagion.
Then, there’s the financial crisis that began in 2007. In places like Boston that had severe busts in the 1990s, they were already talking about a bubble in 2003. Same in San Diego, where, already by 2014, people are worried yet again. Here, the contagion was huge because the pre-conditions showed major vulnerabilities. For example, in the third post on Credit Writedowns in 2008 I pointed to low household savings rates as a harbinger of what was later dubbed deleveraging.
Finally, there is the shale oil bubble, which was financed by lots of Ponzi financing as a lot of investment was contingent on oil at prices in the $70-80 range and above. This bubble burst when oil prices started to fall from over $100 a barrel in 2014. And, as Minsky put it in 1992, “units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.” Oil bottomed near $30 a barrel as a result.
So there are three separate occasions when stability bred instability due to the proliferation of speculative investment. In each case, the stability was broken when monetary policy changed and financial conditions tightened. But the outcomes were different in each case.
So, going back to the question: ‘what next?’, the answer is very dependent on the economy and on the rate regime. In Australia, for example, it’s clear that there is a lot of Ponzi financing in the property sector. But the economy has had the 2nd longest expansion in the modern history of industrialized nations – twenty-six years.
In the US, the economic expansion continues. And I don’t see anything on the horizon (short of nuclear war) derailing the expansion. This includes the Fed’s interest rate hikes. Eventually the Fed’s hikes could derail the expansion. But, for now, all of the indicators are pointing up. The 33,000 job loss isn’t a harbinger of tough times to come. It’s a one-off that will have no bearing over the longer-term.