The Era of Economic Whiplash Is Just Beginning

While some of these discrepancies might be dismissed as bad data — an inordinate amount of noise from the momentous shocks produced by the coronavirus pandemic and Russia’s invasion of Ukraine — they might also tell us something real, rejiggering economic relationships in a way that will complicate the policy response.

“There is measurement noise,” Jason Furman from Harvard’s Kennedy School told me. But “something very weird is going on in the underlying economy.”

Even the standard noise that regularly shows up in the data seems stranger than usual. For instance, GDP is, by definition, equal to gross domestic income. Somebody’s purchase is someone else’s sale.

A modest gap often emerges between readings of the two because they are measured in different ways. But these days the gap is a gaping chasm, wider than anything we have ever seen: While GDP shrank 1.6% in the first quarter, GDI grew 1.8%.

The current thinking seems to be that the GDP reading in the first quarter was off — distorted by some weirdness in inventory accumulation and foreign trade, which are not really central to our understanding of underlying economic strength.

If GDI is “right” and GDP growth turns out to have declined less, or even grown a tad, in the first three months of the year, cleaning up the mismatch between these data would make better sense of the underlying trends. But GDP would have to be hoisted up by a great deal in the last two reported quarters to mesh with standard interpretations of the relationship between economic growth and employment.

Indeed, if the GDP reading is correct, real output per hour of work at nonfarm businesses would have declined 6% over the last two quarters, at an annual rate. Labor productivity has never fallen this abruptly since we started measuring it after the end of the Second World War.

The minutes of the July meeting of the Fed’s brass, released on Wednesday, suggest an institution that is not super sure of its footing: It pretty much assured investors that it will keep raising interest rates until it has evidence that they are slowing the rate of price increases, even if that requires job losses, but it also emphasized the risk of overly aggressive tightening.

To their credit, navigating the crosscurrents is tough when the data misbehaves. How should the Fed interpret a seeming swing in GDP from an expansion of 6.9%, in the fourth quarter of 2021, to a 1.6% contraction in the next? What should it conclude from the fact that real wages are falling but, because of the decline in productivity, unit labor costs are rising faster than prices? Things that usually move together are now moving in the opposite direction: Falling unemployment is usually accompanied by rising job openings. These days both are going down.

We have faced seemingly inconsistent economic dynamics before. We gave them a name in the 1960s: “stagflation,” to describe a then-unprecedented mix of shrinking economic output and high inflation in Britain. But we haven’t had to use the term in half a century.

Since the financial crisis the Fed has had the comfort of knowing unequivocally in which direction to move the temperature gauge, either hot or cold. These days, it has to look down both sides of the street.

“There is an inherent tension,” said Michael Strain, an economist at the American Enterprise Institute who has written for Bloomberg Opinion. “The less the economy weakens on its own, the more the Fed has to tighten. And a big risk is the Fed overtightening.”

Perhaps one can build a congruent narrative in which the seeming inconsistencies straighten out. Businesses might simply be exhibiting whiplash of their own, Furman said, hiring like mad to compensate for their inability last year to hire fast enough to meet rising demand. It might just be a matter of a month or two for them to realize that demand is cooling and to cut back on the hiring.

Why was hiring so difficult? Well, the $2 trillion American Rescue Plan passed in the early days of Joe Biden’s presidency, on the heels of $3.1 trillion in economic stimulus from the Trump administration, fattened workers’ bank accounts to the point that they didn’t have to take the first crappy job on offer — and could stay out of the labor market until a better deal appeared, with better pay.

Covid-19’s shock to supply chains as countries locked down surely contributed to the burst of inflation, even if it was primarily fueled by over-stimulated demand. So did the shift in demand to products from services as people hunkered down to avoid Covid, and the “revenge spending,” as the fear over Covid receded, on everything from restaurant meals to airline tickets.

These unusual patterns of behavior could peter out in time — taking the economy back to when it was easier to read. Long Covid might keep some people out of the labor force. The experience of the last few years might have pushed more folks in the 55-plus range into retirement. But otherwise, normality would look pretty much like it did three or four years ago.

Or maybe not. Fact is, some surprises are probably still in store. Take the emerging battle over workers’ return to the office. We haven’t quite gotten our head around that one. Some economists argue that working from home will boost productivity. Others argue that it will make us less productive.

I guess we’ll find out.

Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Read more articles by Eduardo Porter