On the precipice of recession
today's blowout unemployment report does not change things
For new readers, please read my post “Whither ‘animal spirits,” which explains my theory of “animal spirits,” as John Maynard Keynes colorfully termed confidence levels. I was quoted in a Wall Street Journal article on this theory in the 1990s.
The basic idea is that the unemployment rate is the most sensitive economic indicator. In our capitalist economy, workers are always expendable in a downturn, so people worry when unemployment is above an adaptation level of recent levels. This is because humans judge everything according to what they are used to. It’s the oldest and most universal law in psychology.
If unemployment has been 10 percent for a while, a decline to 8 percent will feel good. The adaptation level, which I calculate as an exponential moving average of values over the past four years, with more recent values weighted more heavily, stands at precisely 4.1 percent, the value of the unemployment rate reported by the BLS this morning. Below is the graph of the unemployment rate and this calculated adaptation level over the postwar business cycle.
Every other time the current unemployment rate crosses over the adaptation level from below (which occurred last month), the economy enters a recession. 2025 will likely present whoever wins the election with a downturn.
If you subtract the adaptation level from the unemployment rate, you get a confidence metric that is now at zero (unemployment rate = adaptation level).
Can the economy reverse from this point? Anything is possible. The guns-and-butter wartime economy of the Vietnam era underwent such a reversal in 1963, which our mad Neocons may replicate as they attempt to get WWIII going.
In any event, interest rates will not come down anytime soon.
But ask yourself: Are you spending more now or pulling back and trying to save money? This is how confidence works: through millions of marginal consumption decisions that feed into production decisions through final demand.
Year-over-year growth in retail sales has been slowing (data to August).
For more details on today’s four-sigma blowout report, see Blowout Payrolls: Sept 254K Jobs Soar Above Highest Estimate, Unemployment Rate Drops And Wages Spike on ZeroHedge.
Edit 10/4/24 11:43 Behind Today's Stunning Jobs Report: A Record Surge In Government Workers
Pray for peace!