America's mismatched economic signals
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Illustration: Aïda Amer/Axios
The U.S. labor market is slowing, but economic growth is not — a confusing combination that muddles the picture of what might be ahead for the economy.
Why it matters: Assessing which data gives the truer reflection of the state of the economy is crucial to appropriately setting the policy dials — neither cutting rates too fast as to reignite inflation nor so slowly as to allow a more serious downturn to take root.
Driving the news: Speaking before more than 100 economists in Nashville on Monday afternoon, Fed chair Jerome Powell acknowledged conflicting signals sent by the employment data and recent spending and GDP data.
- "I would say this tension has not been resolved," Powell said at the luncheon hosted by the National Association for Business Economics.
- "There is a lot of thinking that the labor market may give a better real-time picture in some cases than does GDP data," Powell said. "If you look at prior downturns, you'll often see they weren't predicted by GDP data but they were by one or more aspects of labor market data."
The big picture: A common rule of thumb is that rising unemployment should coincide with a slowdown in economic growth — a relationship known as "Okun's law," named after economist Arthur Okun.
- That relationship looks broken. GDP in the second quarter was up 3% from a year earlier — a span in which the unemployment rate rose by half a percentage point.
- The Atlanta Fed's GDPNow tool currently tracks growth at a 3.1% annual rate in Q3, which ended Monday (the first official estimate will come out on Oct. 30).
The intrigue: The disconnect may reflect businesses finding ways to use artificial intelligence or other technologies to squeeze greater economic output out of existing workers.
- It could also be explained by measurement error in one data set or the other.
- Either way, it complicates the policy choices ahead.
What they're saying: "This disconnect in the data could pose a dilemma to the FOMC, whose members still see GDP growth and unemployment moving in the opposite directions," Marco Casiraghi, an economist at Evercore ISI, told Axios in Nashville after Powell spoke.
- "The question is whether the labor market will continue to soften and push the Fed to cut by 50 basis points in November — or if the strong growth and demand will positively affect labor market conditions, allowing the Fed to cut rates more gradually," Casiraghi said.
Between the lines: Revisions released last week showed that consumers earned and spent more in the first quarter of 2024 than previously thought. In other words, the economic backdrop was even better although the labor market was cooling.
- Powell said the revisions removed "what we have been thinking of as a possible downside risk, that the level of consumer spending might be unsustainable."
- "There is support for thinking the GDP readings that we get are solid and it helps at the margin — but that's not going to stop us from looking carefully at labor market data."
