Two weeks in a row an economic report, first on jobs, then on retail spending, smashed expectations, only to be simultaneously dismissed as a positive trend and used as an excuse to raise interest rates.
Two weeks ago, the moribund United States job market received a much needed jolt, when the May report from the Bureau of Labor smashed expectations with the actual number of jobs created doubling estimates. As Yahoo Finance reported, “The US economy added 172,000 jobs in May, blowing past expectations, according to the government’s closely watched jobs report. The unemployment rate remained flat at 4.3%. Economists surveyed by Bloomberg had anticipated payroll growth of 88,000 for the month.” Further, the report was accompanied by even more good news after previous months were revised upwards, meaning more jobs were created than reported at the time. “April’s jobs report — which itself was a massive beat — was also revised to show an even better 179,000 jobs gained, compared to the 115,000 reported earlier. March’s payroll growth was similarly updated to show 214,000, bringing the first monthly gain above 200,000 since early 2024.” Taken together, the last three months were the best period for job creation in two years. As CBS described it, “Against all odds, the U.S. job market is in a good place…The economy has faced one headwind after another over the past year: the highest tariffs in more than 70 years; the Iran war; a recurrence of the inflationary pressures that slammed Americans during the pandemic; persistent public pessimism, or ‘vibecession,’ as millions struggle with the cost of living; and immigration restrictions.”
Perhaps needless to say, CBS didn’t take the time to question how or why the card carrying expert class duly informed us that disaster was right around the corner as a result of these policies and others. Though it was barely a year ago the experts warned that the tariffs would result in empty store shelves, they are now shocked to discover that the economy is in far better shape than they expected and yet they are loath to consider either why they were wrong or to give any credit to President Donald Trump for being correct. Instead of confronting their failure to make accurate predictions, they have identified another reason entirely, at least in the case of the recent string of jobs reports, “strong corporate profits” which were “a huge part of the equation” according to eToro U.S. investment analyst Bret Kenwell. Indeed, “U.S. corporations boosted their earnings growth in the first quarter by about 28%, while 85% of S&P 500 companies posted quarterly profits that exceeded analysts’ expectations — the highest share in almost five years, according to a FactSet analysis. Corporate earnings growth over the last two years has averaged a healthy 11%. Analysts now expect second-quarter profit growth of about 22%, the financial data firm said.” Rather incredibly, they went on to glancingly acknowledge that the “The Republicans’ ‘One Big Beautiful Bill,’ which lowered corporate taxes…has helped bolster profitability, according to Wall Street analysts,” without mentioning the President specifically or that many experts – and almost every Democrat – claimed the bill would be a disaster for the economy if not outright killing people.
More recently, the Iran War has been a focus of economic prognostication for obvious reasons, with economists almost universally declaring it destructive to our prospects. Last month, CNN asked, “How much damage has the Iran war done to the US economy?” and perhaps not surprisingly, they concluded it had quite a lot, claiming with some truth, that the conflict has “pushed oil and gas prices to four-year highs. That reignited inflation, wiping out Americans’ pay raises for the past year.” The Washington Center for Equitable Growth weighed in a month earlier even more dramatically, combining the impact of both tariffs and the war into a single lament about “Why the Iran war is bad for U.S. economic growth.” As they saw it at the time, “Recent research shows that tariffs imposed since the so-called Liberation Day last year caused a decline in U.S. imports and heightened inflation relative to the pre-tariff trend, with tariff costs distributed unevenly across U.S. industries. The direct costs of tariffs to U.S. businesses and consumers today are compounded by the volatility in tariff policymaking itself by the second Trump administration as firms are forced to hold off on making growth-driving investments and hiring. The Iran war has only made things worse by disrupting key trade routes and imposing even greater policy uncertainty.” While they are honest enough to acknowledge that the “U.S. stock market—a gauge of investor sentiment, not broader economic health—has largely recovered since the advent of the war,” they went on to caution that a “quick diplomatic settlement, itself an unlikely outcome, will not magically undo the physical damage already caused by the war.” As a result, “the direct costs of the Iran war in terms of elevated fuel prices, snarled supply chains, and decimated energy infrastructure will weigh on U.S. economic growth as businesses pass down costs and pull back on investments and hiring. A lack of clarity around the purpose and goals of the United States in the war means businesses are doubling down on the wait-and-see approach they adopted amid the country’s volatile trade war with the world. A diplomatic settlement to the Iran war at some point would bring some immediate relief. But extensive physical destruction to critical infrastructure in Iran and around the Persian Gulf means U.S. economic growth will likely continue to suffer over the medium term to long term.” Similarly, The Hill recently reported on a “new economic outlook released Wednesday indicates that a prolonged disruption of energy supplies resulting from the war in Iran would deliver a severe blow to the global economy, likely causing countries to slip into recession and leading to increased unemployment.”
While the future remains unknown, none of this has happened yet and rather ironically, the opposite appears to have occurred at least in terms of the US job market and another economic report released on Tuesday that found retail spending in May also smashed expectations. As the Associated Press described it, “Shoppers stepped up their spending in May and surpassed expectations as temperatures warmed and gasoline prices leveled off. Retail sales rose 0.9%, up from a revised 0.4% gain in April, according to Commerce Department data released Wednesday,” but once again, this could not simply be good news –especially considering that retail spending has risen for the past four months, meaning throughout the entire course of the war – that defied their predictions for a wide variety of reasons. Instead, “Sales got a boost from generous government tax refunds in both April and May, though economists say that cash cushion is starting to fade.” In a further irony, both of these positive developments were perceived as bad news for the stock market because investors now fear interest rates will remain at the current levels, or possibly even be raised to supposedly fight inflation. As CNBC characterized it, the “Hot jobs report puts Fed cuts further out of reach as Chair Warsh faces policy tests.” “Another big jobs report in May has pretty much swept aside the possibility of interest rate cuts anytime soon — and in the process underscored the tricky policy path ahead for new Federal Reserve Chair Kevin Warsh. The chance of rate reductions already had been on life support heading into Friday’s nonfarm payrolls report. But the unexpectedly strong gain of 172,000, compounded by sharp upward revisions for prior months, makes the case for policy easing even weaker, particularly considering the elevated level of inflation and uncertainty over the Iran war.” “If I’m at the [Fed], I say, ‘look, job growth is good, there’s no need for us to support the labor market. Inflation is high,’” explained Gus Faucher, chief economist at PNC. “So therefore we can keep the fed funds rate where it is right now until we get a better picture of what’s going on on the inflation front.” “Risks to the outlook for consumer spending are to the downside. Much of the strength is coming from the stock market, a correction tied to tech stocks would lead high-income households to pull back on their spending,” he noted regarding the spending report this week. “A resumption of hostilities in the Middle East could drive energy prices higher again and the Fed is more likely to hike than cut rates this year.”
Of course, the chief economist for an organization as large and prestigious as PNC should know better. Contrary to the recent desire to label any and all increases in prices simply as “inflation,” as though it was a purely generalized phenomenon without various root causes and thus potential remedies, it comes in more than one form and for better or worse, the Federal Reserve, even if you assume it works exactly as planned, is only equipped to handle a certain kind. Generally speaking, economists refer to “demand-pull,” where the overall demand for goods and services is higher than the supply, creating the “too much money chasing too few goods” phenomenon, causing prices to rise across the board, “cost-push” where the cost of production increases as a result of a shortage or supply chain issue, and “built-in” where the cost of living rises, workers demand more wages, and companies increase prices to compensate. Given the Federal Reserve can only influence the money supply, either by printing more money or making borrowing money either more or less attractive with lower or higher interest rates respectively, demand-pull is the only kind of inflation they are equipped to address. Indeed, we saw an example of this while President Joe Biden was in office less than two years ago. As a result of measures to combat the pandemic – both additional spending and an increased money supply via low interest rates and printing more dollars – the economy was already flush with cash as the world recovered. President Biden, however, wasn’t satisfied and he chose that moment to pump another $1.9 trillion into the system as part of yet another coronavirus relief package, creating the classic too much money chasing too few goods scenario. Before the bill passed, a former Director of the White House National Economic Council under President Barack Obama, Larry Summers warned this would be the case, claiming the funding was three times bigger than it needed to be, that it was the “least responsible” economic policy in 40 years, and that it created a “perfect storm for inflation.” Needless to say he was correct and a few months after the bill was passed, prices started rising until the Federal Reserve began increasing interest rates and reducing the money supply, essentially cooling off the economy intentionally.
Contrary to the conventional wisdom among the so-called experts these days, price increases due to either tariffs or a challenge with an underlying commodity like oil do not work this way. If anything, the opposite is true. To the extent tariffs increase prices, they do not do so because of a glut in the supply of money. They do so because the government is taking a larger percentage of the transaction than previously, which only serves to shrink the money supply in an era where the government is fueled by significant deficit spending. Intentionally reducing the money supply via higher interest rates in that case, only compounds the effect and ultimately crowds out money for the sort of capital investments in factories and supply chains that could, in the future, offset the tariffs, either by increasing efficiency and lowering costs, or by bypassing them entirely. The situation is similar, yet different with the recent increase in inflation due to rising oil prices (even assuming they will not continue to fall as result of the pending deal to end the war). This is class cost-push inflation rather than demand-pull, and the solution in the medium- to long-term from a policy perspective (as opposed to diplomatic or military) is not to reduce the supply of money. It’s to increase the amount of capital investment in oil production, refining, and distribution outside the snarled supply chain the Strait of Hormuz. Reducing the money supply only makes it harder to solve the underlying problem. Personally, I find it hard to believe that credentialled economists are not aware of this on some level, but so long as they insist otherwise, good news will be bad news and the wiseman will remain fools.
Confessions of a Conservative Atheist 