In a newsletter this afternoon, the folks at Bloomberg observed, in part:
Nonfarm payrolls increased 263,000 in September while the unemployment rate dropped to 3.5%, matching a five-decade low. Average hourly earnings also rose firmly.
The figures are the latest illustration of the worrisome strength of the US job market, at a time when the Fed wants to see just the opposite—cooling wage growth and inflation.
They go on to note that the stock market "cratered" today, Federal Reserve officials blabbed about the need to raise interest rates because of inflation, with only President Biden offering what used to be the normal positive reaction to continuing full employment and higher earnings.
A lot more working and retired folks are worried about the stock market than used to be worried because they have money invested in stocks, mostly in retirement accounts of one kind or another.
As noted in numerous posts on Extended Economic Distortion, the problem is no one understands what is going on nor what is the likely path and outcome. One thing seemingly is becoming obvious - the Federal Reserve raising interest rates has not suppressed full employment or reduced wage growth. Based on the limited evidence to date, it may not have that impact. It could lead to a full blown depression because the experts are over-focused on inflation. The problem is inflation isn't a cause, it is an effect. Interest rates are, at best, only one cause of the Extended Economic Distortion.
Since the beginning of the 21st Century we have seen a significant change in retail sales symbolized by Amazon but, in fact, created by thousands of online retailers. They couldn't have made that change without there being an "online" which really on came into being at the beginning of the century and which has altered behavior in ways unexpected. Most significantly because of the pandemic it has brought about the "working from home" trend which has, of course, brought about empty office buildings, among other things. It also has reduced the time people spend away from home, people who then need to retail shop more online.
Also changed during this period was the reductions in inventory maintained by retailers and wholesalers and manufacturers which required the establishment of a supply chain system which barely avoided a full collapse during the pandemic because folks staying at home were bored and needed to buy stuff. The problem was the related workforce - truck drivers, ship crews, etc., couldn't be increased in such a short period of time while other workers in the supply chain were ...you guessed it... staying at home.
These are just a few more obvious examples of distortions in the traditional economy which the Federal Reserve has no way to address. Also in the midst of the pandemic folks now working from home decided they should buy new homes, particularly since interest rates were so low. Home sales skyrocketed. Now that the Fed is raising interest rates, those homes cannot be easily sold and sale prices are declining leaving huge numbers of folks with recently acquired overvalued homes.
We don't understand the math of the current economy. It is in an Extended Economic Distortion and the Fed needs to pause for at least six months to let the distortion effects provide some information.
But that isn't likely to happen because of the stressed online hand wringing - people just can communicate too much. We're seeing the impact of this over-communication in a predictable outcome - the world-wide growth of support for right wing populist politics. In the extreme this is reflected in Putin's war in the Ukraine.
And we still have no understanding of the likely path and outcome of the Extended Economic Distortion. But we do seem to want to, so badly that we will overreact and mishandle it. And just as Climate Change impacts are becoming more obvious.
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