But if there is one thing that defines this post-crisis expansion, it might be the lack of volatility we’ve seen in the economy. And expansion is now prompting investors and economists to ask whether our old assumptions about economic cycles need to be re-visited.
Later this morning, investors will get the latest jobs report. This data is expected to show that January was another solid month for the U.S. labor market — economists expect 163,000 jobs were created with the unemployment rate holding at 3.5%.
Another month, another steady-as-she-goes report for the most important driver of the U.S. economic cycle.
Now, in 2019, the labor market did slow down. Average job gains last year averaged 176,000 per month, down from 223,000 per month in 2018. But total job gains were still north of 2 million for the ninth straight year.
And while overall growth also slowed in 2019, the stability of the GDP growth, inflation, and the labor market is perhaps more notable than the absolute trajectory of any one of these measures.
“The Great Moderation in the volatility of GDP growth and price inflation, which began in the 1980s, came to an abrupt end with the onset of the financial crisis in 2008 but, a decade later, what stands out again is just how stable economic growth and price pressures have been,” said Paul Ashworth, chief U.S. economist at Capital Economics in a note on Thursday.
“Last year the 10-year standard deviations of both GDP growth and core PCE inflation dropped to record lows. The current expansion is already the longest on record and, with recent fears of an imminent recession fading, is it possible that boom and bust is a thing of the past?”
Growth and inflation volatility have flattened out.(Capital Economics)
Ashworth said the Fed’s tightening cycle of 2017-18 seemed likely to eventually trigger an economic downturn. But the speed with which the Fed reversed course — along with the stalling of further escalation in the U.S.-China trade war — “would seem to have eliminated the near-term risk” of recession.
And as investors have argued for months, so long as the U.S. consumer remains in good shape, the case for an economic downturn is specious at best. And the health of the U.S. consumer ultimately hinges on the health of the U.S. labor market.
About 70% of GDP growth comes from consumer spending. And so more people getting jobs and earning income that enables them to spend keeps our consumer-based economic flywheel turning.
The Fed’s sensitivity to how markets and the economy react to their policy changes also bolsters the view that the expansion could continue uninterrupted for some time. If there’s one thing the Powell Fed seems unwilling to tolerate it is financial market discomfort that could feed into a real slowdown in hiring.
“We believe monetary policy is well positioned to serve the American people by supporting continued economic growth, a strong job market, and a return of inflation to our symmetric 2% goal,” Fed Chair Jay Powell said last month.
“People who live and work in middle-income communities and low-income communities tell us that many who have struggled to find work are now finding new opportunities,” Powell added. “Employment gains have been broad based across all racial and ethnic groups and all levels of education. These developments underscore for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind.”
In other words — if the kind of policy flexibility the Fed has exhibited in the last year is what helps sustain these labor market gains, and the labor market is what fuels this whole cycle, then expect the Fed to continue these tactics.
All this isn’t to say, however, that Ashworth is unreservedly bullish on what the economic future holds.
“Aside from a shock, it is not obvious where a recession would come from — at least in the next year or two,” Ashworth writes. The lack of economic volatility, “doesn’t mean boom and bust is a thing of the past,” Ashworth adds. “As ex-Fed Chair Alan Greenspan warned in 2005, ‘history has not dealt kindly with the aftermath of protracted periods of low risk premiums.’”
But it’s worth keeping in mind that jobs data like what we’re expecting later this morning isn’t just an accident or a random instance of hiring. This economic cycle — like all economic cycles — is informed and shaped by the decisions of policymakers who, for now, have the clear goal of reducing economic volatility.
Against this backdrop, maybe this cycle shouldn’t be so surprising after all.
