Axios Macro

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We're back with another busy week ahead, including the European Central Bank's first interest rate hike in over a decade. And out this morning, homebuilders' confidence had its second-steepest monthly decline in the 35-year history of the survey.

Today we look at a huge puzzle in the U.S. economy — and why a central bank is getting dragged into politics across the pond.

All in all, 697 words, a 2½-minute read (and edited by Javier E. David).

1 big thing: A big economic mystery

Illustration of a small dollar sign magnified by a monocle.
Illustration: Brendan Lynch/Axios

Usually two of the most important indicators of economic health move together: GDP and jobs. More work means more activity that leads to more stuff getting made.

  • Not right now. GDP has flatlined or fallen in the first half of 2022, while job growth has been exceptionally strong.

Why it matters: Either there is a serious data measurement error, or Americans are becoming less productive, or both. None of these options is particularly reassuring.

By the numbers: So far this year, U.S. payrolls have expanded by an average of 457,000 jobs a month. The total number of hours worked in the private sector has been rising as well, and in the first half of 2022, they rose at a 2.5% annual rate.

  • That being the case, you would think economic output would also be rising. Instead, GDP fell at a 1.6% annual rate in the first quarter. It looks likely to show slow growth or further contraction in Q2
  • Analysts expect the preliminary second-quarter GDP number, which is to be released next week, to show only a 0.9% growth rate. The Atlanta Fed's latest "nowcast" modeling GDP contracted at a 1.5% annual rate.

If we take those numbers at face value, it suggests a collapse in American productivity, and the country is now working more to make less: Labor productivity fell at a 7.3% annual rate in the first quarter, the worst reading since 1947.

  • If that's what's really happening, it's a potential crisis for America's economic future, implying that businesses are getting worse at deploying labor to create the goods and services people consume.
  • A more favorable take: Large-scale hiring means firms will have lots of new employees on the job. With time, they will become more productive.

Yes, but: An alternate possibility is that productivity hasn't really collapsed. Rather, either GDP or jobs — or both — are sending misleading signals.

  • In particular, while GDP looks weak, Gross Domestic Income, which aims to measure overall economic activity through a different approach, has been solid. (Look for more on this divide in this space in the coming days).
  • "GDP and GDI are basically measuring the same activity in different ways," Federal Reserve governor Christopher Waller said last week, "and in the past when such wide gaps in the two numbers have appeared initially, they tend to move toward each other when the data are finalized."

Other data supports the notion of a strong labor market. If job growth has really been as strong as the reported numbers, you might have expected the unemployment rate to decline in recent months.

  • Instead, it has held steady.

The bottom line: The eventual solution to this mystery — whether falling productivity, understated GDP, or overstated job growth — will matter tremendously for understanding how robust the U.S. economy really is heading into a potentially difficult future.

2. Central bank politics

The five Conservative Party leadership contenders vying to become Britain's next prime minister during Sunday's televised debate. Photo: Jonathan Hordle/ITV via Getty Images

The U.K. is dealing with the worst bout of inflation since 1982 that's forced a cost-of-living crisis.

So it's no wonder that this weekend, during televised debates between candidates gunning to succeed U.K. Prime Minister Boris Johnson, the Bank of England was dragged into the leadership race.

What's going on: Candidate Liz Truss, the country's foreign secretary, was the loudest critic — taking a shot at the Bank of England for failing to tame soaring inflation.

  • She suggested she could change the central bank's mandate if she wins power, adding that she would "make sure it's tough enough on inflation." She also said the government should set a "clear direction of travel" for monetary policy.
  • Truss suggested the BoE was not "tough enough" on the issue of money supply, pledging to address it.

Today, a BoE policymaker shot back: "The foundations of the U.K. monetary policy framework are really important, and best left untouched," said Michael Saunders, a member of the central bank's interest rate-setting committee.

  • As for a possible money supply target: "It's reasonable to pay attention to money and credit growth. That's a very different thing to saying that you should have a target for it," Saunders said.

Worth noting: As inflation spooks policymakers around the world, the BoE was the first major central bank to kick off rate increases in December.