The Federal Reserve Open Market Committee (FOMC) maintained its restrictive policy rate and Quantitative Tightening (QT) in its July 31 policy statement. Chairman Jay Powell repeatedly referenced more balanced risks between inflation and maximum employment in his press conference. Powell commented, “Now we’re back to a closer to even focus, so we’ll be looking at labor market conditions and asking whether we’re getting what we’re seeing and as I said, we’re prepared to respond if we see that it’s not what we wanted to see, which was a gradual normalization of conditions. If we see more than that, and it wouldn’t be any one statistic, although of course the unemployment rate is generally thought to be a single, a good single statistic, but we’d be looking at wages, we’d be looking at participation, we’d be looking at all the things; surveys, quits, hires, all of those things, to determine the overall status of the labor market. But we’re looking at it now. I would say again, I think you’re back to conditions that are close to 2019 conditions, and that was not an inflationary economy. Broadly similar labor markets then, I think inflation was actually, core inflation was actually running below 2 percent. So we don’t think, I don’t now think of the labor market in its current state as a likely source of significant inflationary pressures. So, I would not like to see material further cooling in the labor market.â€
BLS released the July Employment Situation report (August 2) which indicated headline jobs growth of 114K new jobs. The discrepancies between conditions found in the Household and Establishment surveys within the report persisted and the underlying labor market weakness finally seems to be noticed by markets. Per the Household survey, only 67K new jobs were created in July and just 57K net new jobs have been created over the past year. The Household survey also found that the number of people in the U.S. who are unemployed is 21.3% higher than a year ago.
As the U.S. labor market deteriorates and the FOMC appears to be in ongoing policy error, which is too restrictive, U.S. fiscal condition is worse. July 26 marked the first close for which U.S. Total Public Debt Outstanding topped $35 Trillion. The milestone led me to run debt numbers for the first part of the 21st century. I found that bad fiscal policy has bipartisan support in Washington. For the past 24 years, regardless of party control U.S. debt has steadily risen about 7.5% each year.
Sadly, nominal GDP over the period is only growing about 4.4%. I cannot pragmatically expect any change in deficit spending in the future. At 7.5% annual debt growth, we should expect to reach $70 Trillion sometime in 2034. If the rate of nominal GDP growth remains at 4.4%, then the Debt in 2034 will be in the range of 160% of GDP. I find it hard to believe the rate on 10-year Treasuries would be lower from today in that scenario. But, hey, Japan’s 10-year rate is 1% and their Debt to GDP ratio is 2.6x and everything looks fine there, right?