Investors are cheering signs that the economy is slowing down. Democrats are not.
Recent polling by Gallup shows the economy and inflation remain far and away the No.1 issue for voters. Democrats are in panic mode, as Donald Trump continues to lead President Biden on managing our nation’s finances. As growth slows and the jobs market cools, Biden could fall further behind in this critical match-up. After all, the president boasts incessantly (and erroneously) that he has “created” 15 million new jobs; he claims low employment is his signature achievement. How will he explain a downturn in hiring?
Liberal economist Paul Krugman is calling for the Federal Reserve to cut interest rates — now. He worries that the Fed is “waiting too long while the economy starts to crack” and cautions that the jobs market is softening. (We will soon get another read on the health of employment.) He joins numerous Democratic politicians, like Sen. Elizabeth Warren (D-Mass.) and members of the Progressive Caucus, who have urged Fed Chair Jerome Powell to cut rates for months, worried that a swooning economy will damage their political prospects.
Expect those calls to get louder. ADP just reported that employers added only 152,000 workers in May, way below the consensus estimate of 175,000 and the lowest since January. Hiring slowed sharply in manufacturing, according to ADP, and also fell off in leisure and hospitality.
Signs of a cooling jobs market are everywhere — even in the recently reported and better-than-expected ISM Services report for May. That tally revealed renewed expansion after a downturn in April, an acceleration in new orders and higher inventories. But even with the uptick in business, employment in the services industries contracted, for the fifth time in six months.
Elsewhere, the latest JOLTS report shows job openings at the end of April falling to a three-year low; the private-sector number dropped 223,000 from the prior month and 1.7 million from the year before. Even government job postings have trended (slightly) lower; imagine that. The number of unemployed persons relative to jobs available has been trending higher for months and is now at 0.8, up from 0.5 for much of 2022.
Private-sector hiring, according to the JOLTS report, has been slipping gradually for months and is off 5 percent from a year ago. Almost all sectors show a year-over-year decline in hiring: manufacturing, wholesale and retail trade, leisure and hospitality, financial activities, real estate and even construction — remarkable, given the hundreds of billions of dollars being spewed across essential swing states by the Biden White House, hoping to attract votes. What sector is increasing its hiring? Healthcare and social assistance, boosted by ramped-up government outlays.
The ADP figures tend to be volatile, but remember that the April report from the Bureau of Labor Statistics showed that hiring amounted to only 175,000 jobs, a marked slowdown from the average monthly gain of 242,000 over the prior 12 months. The average workweek in April was also slightly lower.
The fall-off in hiring is consistent with weaker consumer spending. The Commerce Department reported that retail sales were flat in April, considerably below expectations, after rising 0.6 percent in March. Many analysts have expected the consumer to run out of gas, as Americans spent down the excess savings piled up during the pandemic. Trillions in relief payments propelled booming outlays over the past few years; that trend appears to have run its course. Americans have taken on record amounts of credit card debt to keep the party going but as income growth has slowed, delinquencies on that debt have begun to rise. With interest rates on credit card borrowings topping 20 percent, increased defaults are inevitable.
Krugman, in a recent column in the New York Times, argues that the battle against inflation is done, and scoffs at those who say rising prices remain a threat to the economy. He is especially concerned that the Fed is overly obsessed with the “inflation boogeyman,” and likely to keep interest rates higher for longer as a result. He says focusing on rising prices is symptomatic of “inflation brain” and hints that the “hot” inflation readings of recent months might have been a “statistical illusion.”
Of course, this is the same Krugman who made a strong pitch that inflation wasn’t really that bad as long as you didn’t include food, energy, housing, used cars and most other life necessities. It is possible that the lefty economist is not exactly in sync with the American public.
Krugman supposes that the Fed could delay rate cuts for political reasons, noting that Trump supporters might view a market-friendly policy pivot right before the election — which is what Krugman advocates — as trying to influence voters. He also warns ominously that, if elected, Trump might threaten the Fed’s independence.
Ironically, the New York Times reports that Democrats are doing exactly that today. Americans are fed up with sky-high interest rates, which have made it nearly impossible for young people to buy a starter home or for small businesses to borrow. Biden’s Democratic colleagues want him to push Powell to lower rates. Surveys show voters are worried that if Biden is reelected, rates will stay high; they do not expect the same from Trump.
Inflation has come down, but not at the Fed’s 2 percent target. Recent reports show that achieving that “last mile” could require keeping rates at current levels. Democrats want to risk higher prices for political gain; Powell has, to his credit, resisted that pressure so far.
But let us note that Powell has never acknowledged that the real culprit here, the reason that prices soared in recent years, is that Democrats have spent like drunken sailors, raising government spending to levels reached in the past only during World War II and other national emergencies. Democrats should welcome Powell’s obstinance; he provides a welcome and needed scapegoat.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim and Company.