The chart below tells you why the Fed and its Wall Street megaphones can’t figure out what is actually happening to the US economy; and, also, why the White House is hopelessly out to lunch in its claims that Bidenomics has been a roaring success.
To paraphrase the Captain in Cool Hand Luke, what we’ve got here is failure to calculate. That is, the US economy has been radically tortured and twisted by the pandemic era lockdowns and stimmies. So normal economic activity that was disrupted and deferred during the worst lockdown quarters of 2020-2021 has now re-emerged in 2022-2024.
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At the same time, the $10 trillion worth of fiscal and monetary stimmies which were force-fed into the US economy during 2020-2021 could not be immediately absorbed by the reduced level of main street activity back then. So they were essentially stock-piled in a huge, unprecedented build-up of household cash balances.
The purple line in the chart below shows total household cash balances (currency, bank deposits and money market funds) relative to GDP. During the decade or so before March 2020 that ratio stood at about +/-59%. But it then soared to 77.4% during Q2 2020 when nominal GDP contracted by 34% owing to the Lockdowns, even as Washington pumped $2.2 trillion of cash into the economy via the CARES act.
In dollar terms, household cash balances (dashed black line) went from a normal $13.4 trillion in Q4 2019 to a peak of $18.3 trillion in Q1 2022, by which time the entire $6.5 trillion of fiscal stimmies had been largely distributed to the main street economy. Yet had the historic ratio of 59% been in place in Q1 2022, the level of household cash balances would have been about $14.8 trillion, meaning, in turn, that households were sitting on about $3.5 trillion of extra-normal cash balances.
This $3.5 trillion cash hoard has functioned as a counterweight to the Fed’s monetary braking action since March 2022. What has happened is that the earning power of those cash balances has soared as overnight rates went from 25 basis points to 525 basis points, even as households have been slightly reducing their extraordinary cash balances.
Nevertheless, by Q4 2023 household cash balances stood at $18.0 trillion, which was still far above normal levels. Again, at the 59% historic ratio the household cash balance in Q4 2023 would have been about $16.5 trillion, meaning that the size of the cash hoard was still $1.5 trillion larger than normal.
In effect, households have kept on keeping on when it comes to consumption spending because these huge, extraordinary cash cushions have bolstered confidence, even as the Fed has attempted to cool-down economic activity. This huge cash cushion essentially represents a form of delayed “stimulus”, which was sequestered during the disruption of the pandemic era and is now replacing what would have otherwise been an increase in the household savings rate and corresponding reduction in current consumption spending.
Then again, upwards of 60% of this extraordinary household cash hoard has now been liquidated, as the excess balances have dropped from $3.5 trillion to $1.5 trillion. And as this cash cushion gets ever thinner in the months and quarters ahead, consumer psychology is likely to get more cautious, causing the measured savings rate to rebound.
Household Cash Balances and % of GDP, 2013 to 2023
In short, the Fed way over did it (as usual) with the easy money after the Great Financial Crisis and then the headlong plunge into insane levels of money-printing after March 2020. The resulting inflationary surge and Fed pivot to monetary braking action is thus straight out of its failed historic playbook, meaning that the next Fed-fostered recession is guaranteed.
The different wrinkle this time, however, is that the recession is being artificially delayed. That’s because the combined fiscal, monetary and regulatory branches of the state generated a witch’s brew of financial contortions during the pandemic period that have temporarily turned an economic sow’s ear into the simulacrum of a silk purse.
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As to the latter, today’s Jobs Report for March provides a striking case in point. The 303,000-job gain was described in the financial press as red hot and a blockbuster, but it was nothing of the kind. It represented the action of an economy that is living on borrowed time per the above-described cash cushion, and made to look even healthier by the purely bogus topline of the BLS establishment survey.
As some astute observers have noted with respect to today’s report, for the past several quarters nearly all of the ballyhooed job gains have been in the part time sector. But you have to systematically unpeel the BLS’ ludicrously contorted and goal-seeked headline jobs number to get there. The latter would have you believe that between June 2023 and today’s March 2024 report, about 2.1 million new jobs have been created in the US economy, which amounts to a seemingly healthy gain of 234,000 per month.
But that is from the so-called “establishment survey”. The latter is based on “mail-in” ballots from about 119,000 US businesses or about 2.0% of the nation’s 6.1 million total business units that have at least one paid employee. At the present time, however, the response rate to the BLS survey is barely 43% compared to 63% as recently as 2014. Moreover, there is no especial reason to believe that the missing 68,000 responses are random or consistent with the mix of firms actually mailing in their results in prior months, quarters and years.
That doesn’t slow down the green eyeshades at the BLS, of course. The numbers for all the missing respondents and the rest of the full business economy are trended-in, guesstimated, imputed, modeled-in, birth/death adjusted, seasonally manipulated and otherwise puked-up out of the BLS’ goal-seeked computers. And then on Jobs Friday once per month, trillions of dollars’ worth of capital markets securities value moves up or down instantly and often materially on their publication.
Never mind that everything below the BLS report’s headline jobs number warns of disconnects, inconsistencies, puzzles, contradictions and unreliability. For instance, today’s companion “household “survey, which is based on 50,000 phone interviews, as opposed to mail-in reports, indicated a job gain of nearly 500,000 for the month of March, but, alas, they were all part-time and then some.
While that doesn’t sound nearly so robust as the headline establishment survey number, it’s actually not even the half of it. If we go back to what appears to be an interim economic peak for this cycle, the household survey reported 161.004 million total employed workers in June 2023, which figure posted at 161.466 million in March 2024. The implied gain is 462,000 “workers” as opposed to the 2,106,000 additional “jobs” reported in the establishment survey for the nine months ending in March.
So either each new “worker” in March was holding down 4.6 “jobs” or there is a skunk on the woodpile here somewhere. And in fact, the full time versus part time employee factor turns out to be a special kind of big when it comes to the stink on the numbers.
According to the BLS, here are the levels and the change between June 2023 and March 2024 for these two household survey categories:
- Full-Time Employees: 134.787 million versus 132,940 million for a loss of 1,847 million full-time employees.
- Part-Time Employees: 26.248 million versus 28.632 million for a gain of 2.368 million part-time employees.
We’d say go figure or, better yet, throw a dart at the BLS report and go with the number it lands on—since nearly all of them are badly massaged and incessantly revised.
To be clear, our point here is not to give the BLS a C- for its desultory efforts at job counting. To the contrary, it’s to give the Federal Reserve an F for even presuming that it can fiddle America’s $28 trillion economy between full employment and inflation on a month-to-month and even day-to-day basis via massive open market operations on Wall Street.
The whole misguided effort at monetary central planning has been an abject failure in part because the US economy—integrally intertwined in the $105 trillion global economy—is too complex, fast-moving, opaque and ultimately mysterious to be stage managed by the 12 mere mortals who sit on the Fed’s Open Market Committee, and who on a daily basis command the movements of tens of trillions of securities and derivative financial instruments.
Back in the day, Hayek referred to this as the problem of socialist calculation, and it has not gone away simply because Gosplan style socialism has been supplanted by central bank-based financial command and control.
Moreover, even if the information and calculation problem were somehow to be overcome by wiring the brains of every consumer, workers, business manager, entrepreneur, investor, saver and speculator to a 10,000 acre farm of Cray Computers, the insuperable difficulties of the Fed’s self-assigned mission of plenary economic control would not be remotely overcome. That’s because rate cuts and interest rate suppression long-ago lost their potency in an economy now saddled with $98 trillion of public and private debt.
In any event, the proof is actually in the pudding from today’s jobs report. Between 1964 and the dotcom peak in March 2000—and at a time before money-printing really went off the deep-end—the BLS’ reasonably serviceable metric for total hours worked in the private economy had grown by about 2.0% per annum. Add another 2.0% per year for productivity improvement due to robust investment, technology progress and the equipping of workers with more and better tools and production processes, and you had a 4% growth economy.
Obviously, no more. The Fed’s massive inflation of financial assets has caused a drastic diversion of capital into speculation on Wall Street rather than productive investment on main street—so productivity growth has faltered badly.
At the same time, the inflation-saturated US economy has lost much of its industrial base to lower cost venues abroad. Consequently, since the pre-crisis peak in November 2007, the growth rate of private sector labor hours employed has plunged to just 0.87% per annum.
At the end of the day, there is no doubt about it. Both productivity growth and labor growth have been systematically undermined and diminished by the kind of Keynesian monetary central planning currently pursued by the Federal Reserve. And the current inching toward a new round of destructive money-printing is just further proof of that truism.
Nevertheless, the failure of monetary central planning has not diminished the harm being imposed on main street America by Fed policies. For instance, during the most recent month (January) US home prices were up by 6.o% on a Y/Y basis, and were therefore just one more reminder of why the Fed’s pro-inflation policies are so insidious. In essence,they set up a running battle between asset prices and wages, and the former wins hands down.
For avoidance of doubt, here is the long view on the matter, with home prices indexed in purple and average wages in black.
Index of Median Home Price Versus Average Hourly Wage, 1970 to 2023
We have indexed the median sales price of homes in America and the average hourly wage to their values as of Q1 1970. That was the eve of Nixon’s plunge into pure fiat money at Camp David in August 1971 and all the resulting monetary excesses and metastases since then.
The data leaves no room for doubt. Home prices today stand at 18.2X their Q1 1970 value while average hourly wages are at only 8.7X their value of 54 years ago.
Expressed in more practical terms, the median home sales price of $23,900 in Q1 1970 represented 7,113 hours of work at the average hourly wage. Assuming a standard 2,000 hour work year, wage workers had to toil 3.6 years to pay for a median-priced home.
With the passage of time, of course, the Fed’s pro-inflation policies have done far more to goose asset prices than wages. Thus, at the time of Greenspan’s arrival at the Fed after Q2 1987 it required 11,350 hours to purchase a median home, which figure had risen to 12,138 hours by Q1 2012 when the Fed made its 2.00% inflation target official. And after still another decade of inflationary monetary policy, it now stands at just under 15,000 hours.
In a word, today’s median home price of $435,400 requires 7.5 standard work years at the average hourly wage to purchase, meaning that workers now toil well more than twice as long as they did in 1970 to afford the dream of home ownership.
So the question recurs. Why in the world would our esteemed central bankers wish to impoverish America’s workers by doubling the working hours needed to buy a median priced home? And, yes, the above assault on the middle class is a monetary phenomenon. It was not caused by home builders monopolizing the price of new houses nor by shortages of land, lumber, paint or construction labor over that half-century period.
To the contrary, when the Fed inflates the monetary system, the resulting ill-effects work through the financial markets and real economy unevenly. Prices, including those for labor and assets, do not move in lockstep, because foreign competition holds down some prices and wages while falling real interest rates and higher valuation multiples inherently cause asset prices to rise disproportionately.
Thus, the reference rate for all asset prices — the 10-year US Treasury note (UST) — fell drastically in real terms during the last four decades of that period. Real rates at 5%+ during the 1980s fell to the 2–5% range during the Greenspan era, and then plunged further, to zero or below, owing to the even more egregious money-printing policies of his successors.
Inflation-Adjusted Yield on 10-Year UST, 1981 to 2023
The stated purpose of the easy-money trend depicted above, of course, was to spur more investment in housing, among other sectors. But that didn’t happen. The residential housing investment-to-GDP ratio dropped from the historical 5 –6% zone prior in 1965 to an average of 4.5% during the period of the Greenspan housing bubble peak in 2005. After the housing crash during the Great Financial Crisis it barely posted at 3% of GDP before rebounding irregularly to 3.9% in 2023.
Any way you slice it, however, the aggressive monetary expansion after 1987 did not spur incremental housing investment on any sustainable basis. Instead, it led to debt -fueled speculation in the existing housing stock, sending prices rising far faster and far higher than the growth of household income and wages.
Residential Housing Investment % of GDP, 1950 to 2023
An alternative measure of the impact of easy money on housing investment can be seen in the index of housing completions relative to the US population. Since the early 1970s that ratio has been trending steadily downward and now stands at only 45% of its 50-years-ago value.
Index of Private Housing Unit Completions to the US Population, 1972 to 2023
Needless to say, if cheap mortgage credit were the elixir it is claimed to be, the line in the chart would have trended skyward. As it happened, however, it is a stinging repudiation of the very essence of the case for low interest rates so relentlessly promoted by Wall Street and Washington alike.
At the end of the day, the US economy is not remotely “strong”, as the talking heads blathered about again today. Likewise, the BLS report is once again hardly worth the digital ink it is printed upon.
So, a central bank policy based on a monetary politbur0 fiddling the nation’s massive $28 trillion economy toward undefinable and immeasurable full employment and 2.00% inflation can be described in only one way. To wit, a train-wreck in full flight.
Reprinted with permission from David Stockman’s Contra Corner.
