Hi everybody. I’ve been having an extremely busy week, so no two talking heads conversation this week. Just my head talking alone for a relatively short time.
Hi, I’m Paul Krugman. I’m winding down some travel, and I’ve been meeting all sorts of people face to face, so virtual interactions are down. So just to give you some kind of Saturday video, I thought I would talk a little bit about latest economic news, markets — things that I don’t normally weigh in very much because that kind of market commentary is usually something that is best done by business economists who are focusing on the day-to-day stuff talking to market participants. But I think that the latest stuff is interesting enough to warrant some discussion and maybe a way to think about where we are economically right now.
So okay, if you’re paying attention to this stuff you probably know that yesterday was a job report day. The report was unusually strong, certainly stronger than almost any of the professional forecasters expected, 172,000 jobs.
Predictably, Trump first boasted about this with a lot of talk about how you know we didn’t have this kind of prosperity under Joe Biden. It is kind of odd given how well things are supposedly going how much Trump and his people talk about Biden. If it was really that much better would you need to be constantly comparing yourself and making claims about how much better you’re doing?
For what it’s worth you know how often during his 48 months in the White House did Biden preside over job reports that were as good as yesterday’s in terms of job creation? The answer is 37 times.
Now, there are reasons why the rapid job growth of the early Biden years, which was coming out of the COVID slump, can’t be replicated. And the fact that immigration is way down means that a normal jobs report is going to be a lower number.
But still this was unexpectedly high job growth but not really something that should alter your fundamental view about how the economy works, although the near-term outlook looks stronger than you might have thought.
One thing I should say, since there are some people wondering, can we trust these numbers? And particularly pointing out that the unemployment rate did not fall, even though we had a unexpectedly big job creation number and wondering how does that add up, are these books being cooked? The answer is no. You’re not helping by saying that.
I’m not saying that the books might not be cooked at some time in the future, but we will know. It will be obvious that this is happening. And it would basically be impossible to do it without there being lots of warning bells, without there being lots of whistleblowers.
So far, the Bureau of Labor Statistics is still apolitical, professional — under-resourced, which is becoming a problem — but these are the best numbers they could do.
If you’re puzzled by how we can have strong job growth and no change in the unemployment rate, the answer is that these are two different surveys. The unemployment rate is based on a survey of households. The job creation number is based on a survey of employers. Those numbers don’t have to match up. I mean, in an ideal world, they would always tell the same story, but there’s statistical noise, there’s sampling error, there’s just conceptual differences.
So this kind of discrepancy is not that unusual. And what it really tells you is, well, is the economy, is the labor market really sort of flat, which is what the unemployment numbers suggest, or are we seeing at least a mini boom in employment, which is what the
nonfarm payroll numbers suggest? And the answer is who knows? Time will tell. Over the course of a year there’s not usually a significant discrepancy in the stories these numbers tell; month by month, well, it’s noisy and you shouldn’t overreact.
Okay trying to make sense of what is going on — why is the labor market as strong as it appears to be? One important point about the economy right now is that there are three big forces that are hitting us. It would be really great from the point of view of professional economists if just one thing would happen at a time. But unfortunately, that’s not how it works. So there are three things happening. First, we are still feeling the effects of Trump’s erratic tariff policy, which has had a depressing effect on employment — not so much the tariffs themselves as the uncertainty. It’s very hard for businesses to make plans, very risky for them to sink money into new ventures when they have no idea what the tariff regime will be a few months down the road. But that uncertainty probably did a one-time hit to employment which is mostly probably behind us because yeah we have crazy erratic trade policy, but that’s now just a piece of the landscape which affects the level of employment, maybe, but not the rate of growth. The second thing is AI. So we have this enormous boom in spending on data centers, a large surge in investment, big rise in stock prices because of hopes about what AI might return. There are not that many people who benefit from high stock prices, but these are people with a lot of money and a lot of spending power. And if they go out and spend more, that boosts the economy. So that’s a sort of force that operates in opposition to the effects of the tariffs.
And possibly the AI-driven spending is coming on now while the tariff effect is sort of closing out.
About oil: For what it’s worth, prediction markets are by and large evil things, but they do give you a quick way of summarizing conventional wisdom. And just about a week ago,
Kalshi said that the probability that the Strait of Hormuz would be open by August 1st was 60%. It’s now 26%. So people have justifiably gotten very skeptical of White House pronouncements that this is just about over. They should have been more skeptical before.
But anyway, it just does not look like it’s going to open. And there’s a still huge remaining uncertainty about what does this imply? Through all of this there’s been a dichotomy between people in financial markets — including people in the futures market for oil who are presumably more professional, less vibes driven than a lot of investors — and what people who actually study the physical market for oil have to say.
And right now futures prices are way up from where they were before the war, but they’re still under $100. Yet the oil industry people are basically hair on fire, saying, we’ve been meeting the loss of supply from the closure of the strait by drawing down inventories and the inventories are very close to critical critically low levels — there’s a certain amount you need to just sort of function — and there were a lot of warnings that really bad things would happen if the strait wasn’t reopened by June 1st. Well guess what here we are, it’s June 6th, D-Day, and the strait is not open. So is there a really severe oil crunch just a few weeks down the pike, or is it kind of manageable?
So are we going to be hovering around current oil prices? I still find the physical oil argument quite persuasive, but I do wonder, again, it’s not like there are a lot of meme stock investors speculating in oil futures. That’s not a market that you would expect to be
highly emotional. We know that there are insider traders who seem to know what Donald Trump is going to do a few minutes before he does it, who are in the market, but they’re probably not enough to be seriously, on a sustained basis, distorting the price. So I don’t know what’s happening on the oil scene except that it is a source of worry.
Other objective economic facts: that jobs report also showed wage growth slowing, which it has been doing for a while, at the same time as inflation has been accelerating. Inflation was first pushed up by the tariffs, and now has been pushed up further by oil prices and prices of other goods, fertilizer, helium, that were transiting the Strait of Hormuz. That hit to prices is not all the way through the system. There’s a lot of effects, particularly from diesel prices and also fertilizer, that will show up over time in higher prices of goods that involve using these hydrocarbon-based resources to operate. So inflation is likely to stay elevated for a while. With wage growth slowing down, we are almost surely looking at least another couple of months of falling real wages, which is not a good thing.
I’m a little skeptical of all the K-shaped economy stories — up at the top and down at the bottom. A lot of that is sort of going beyond what the data really say. But it is definitely true that people who earn their income are being hit by inflation and not being compensated with higher wages, while people who own lots of stocks have been doing much, much better. So that’s a real bifurcation.
Of course, people who own lots of stocks are not feeling as good as they did a week ago. We’ve had a significant fall in the stock market and then a real tumble yesterday, more than 4% on the NASDAQ, somewhat less on the other indices, but still significant decline in stocks. The President of the United States went on a rage tweeting or whatever rage truth socialing spree sand said good jobs report should send stocks should go up not down. He somehow or other managed to find ways to contrast himself with Biden and make a lot of accusations against industry people who under-forecast this jobs number as suffering from Trump derangement syndrome.
Actually, a quick point there about conspiracy theorizing. I know people who have to do these NFP, non-farm payroll projections, and they are, whatever their personal views, their job depends on being as correct as possible in the forecast. Every month, they’re evaluated. They have a story. They have a number. Their prediction will be wrong. But there’s always a question, were you better or worse than other forecasters? They do not have any space to indulge their political views.
They will get it wrong. This happens all the time. The economy is a complicated thing. And even with the best will in the world even with the best information in the world, you are going to get it wrong. The idea that there’s a special negativity of economic forecasters towards Trump is ridiculous if you were awake during the last five years. Many of us still remember when Bloomberg put the odds of recession, this was in 2022, put the odds of recession over the next year at 100%. There was no recession.
I don’t think I ever suggested that the professional forecasting of the economy was politicized. And I don’t think it was politicized either for or against Biden, and it isn’t politicized for or against Trump. There was a fundamental misconception, I think, behind those recession forecasts. But that is not a case of politicization.
Anyway, there’s certainly no call for Trump to see himself as a victim. So what is happening? Trump professed to be baffled that a good jobs number should make stocks go down. But of course, it’s actually quite straightforward. What’s happening here is that with the combination of elevated inflation, now largely driven by the effects of Iran, and a job market that is holding up — that is not, in fact, falling off a cliff, if anything, appears to be accelerating — there is no case for cutting interest rates. A few months ago it seemed
plausible that there would be some reduction in interest rates, that the Fed would have a rate cut or two this year. Now the chance of a rate cut, according to the market implied probability uh is around one percent. So there’s essentially no chance that rates will be cut and last I saw the market implied probability that rates will actually be increased is about 70 percent. Not big rate hikes but the Fed is probably going to find itself wanting to lean
against potential inflation, against the possibility that inflation might get entrenched in the economy which is always their great concern. That’s not going to lead to drastic action but by any historical criteria there are is no case for cutting rates and there’s starting to be a reasonable case for increasing rates. Lots of stuff can happen but probably not soon so your expectation about what’s going to happen to the fed funds rate which is a very short term rate, actually literally overnight, has risen substantially that in turn leads to higher rates on longer term stuff which is what matters for economic activity. And that rise in interest rates hurts stocks. There’s always a couple of different ways to say this, but should you put your money in stocks or in bonds, well, if interest rates are higher, people are less inclined to put in stocks or what is really an equivalent thing, since the price of a stock depends upon expectations of profits in the future, if interest rates are higher those future profits are discounted more which means that the price of stocks should fall.
And consistent with that story, the biggest falls in yesterday’s action were in stocks whose value depends much more on profits, hoped for profits sometime well into the future. So the NASDAQ fell 4%. The S&P, which is kind of a mixture of growth stocks and stocks that are driven more by current earnings fell less than that. The Dow, which is even more established companies who already have their profit flows fell less. So this was very clearly interest rates are going to go up because the economy is holding up while inflation is a little worrying and the Fed is not going to cut rates and may well raise rates so of course stocks are down. Nothing odd about that, nothing perverse. All that we learn is that the President of the United States doesn’t understand any of this and he just thinks that he should get interest rate cuts as a gold star for his incredible efforts.
The interesting plot here is what does this do to Kevin Warsh, the new chairman of the Fed? Warsh was installed by Trump as somebody who Trump believes will do his will, that he will cut interest rates because Trump says we should cut interest rates and that he will find ways to justify it. And Warsh has been gesturing in that direction, calling upon the Fed to use different measures of inflation that look more benign than the standard measures. That’s an interesting debate, but it’s just so obviously motivated reasoning. It clearly says pick the inflation measures that show the lowest inflation so that we can make a better case for interest rate cuts, which is what Donald Trump wants. It’s clear that this is not a serious intellectual argument.
But I think he has basically no chance of getting those rate cuts. Again, the Fed is not a dictatorship, it’s not even like a corporation where the CEO gets to make big
decisions on his own. The Fed’s interest rate policy is set by a committee — the federal open market committee — which is a mixture of long-serving members of the federal reserve board and presidents of regional feds. Basically it’s not answerable to Donald trump it’s answerable in the long run to elected politicians, but that’s quite a long-run thing. And outside of Trump’s creatures, there is zero support for interest rate cuts on the Fed board now, as there should be none. The logic of an economy where employment still seems to be plugging along and inflation is high is not one in which there’s any rational argument for cutting interest rates.
So what does Warsh do? Does he act like a professional central banker, in which case he will incur enormous rage from the White House, or does he advocate for stuff that he knows, he’s not stupid, and that everybody else, that all of his colleagues know is really, really bad policy, and then just keep losing votes at the FOMC, thereby becoming the least respected, least influential Fed chairman in history. and I don’t know which way that goes but pass the popcorn.
I hope that I’ve been clear in the past in warning people against expecting instant gratification in people who are opposed to Trump in expecting instant gratification I’ve been I’ve made that mistake myself as well but if you want the fact that Trump is doing terrible things, which he is, to cause a severe recession now or a month from now or six months from now, well, unfortunately economics is not a morality play. The wages of bad behavior take much much longer and are much more diffuse. There’s all kinds of things happening out there so the idea that you could expect catastrophe just because you have catastrophically bad leadership is true in warfare as we’re seeing in Iran, it’s true maybe at the level of corporate competition. But something like the US economy is a lot less sensitive especially in the short run to the quality of leadership at the top of the United States because the US government influences the economy but doesn’t run it so this is not going to be the kind of spectacular flame out that many people would like for political reasons to see. So on we go.
For what it’s worth, I don’t see anything that’s happening now that will turn around the public’s extremely negative view of the economy. Most people don’t care what the job number is, as they shouldn’t. It’s not something that affects their lives directly. The perceived state of things is that although we don’t have high unemployment,
jobs are hard to find and prices are rising and they’re rising faster than wages. That’s not an ideological point, that’s just a fact. So people are going to stay negative and I guess have some sense that we have crazy erratic leadership. And loud proclamations that this is the
hottest economy ever and it’s great and it’s wonderful are almost truly counterproductive politically. This is a time when Trump could really take some lessons from Bill Clinton and say that he feels our pain, which would be a lie. He doesn’t, but he can’t even pretend that he does.
And so this is going to continue to be a very negative economic situation. The one thing that I think Trump thought he had was the stock market, which is again not that relevant to many people but statistically appears to have some impact on consumer sentiment so naturally he’s enraged that stocks went down after yesterday’s pretty good jobs report.
So I do think that we’re looking at a situation where it’s hard to explain why people are quite as negative on the economy as they are, except that it they have a kind of cumulative feeling that the system is rigged and that the people in charge are not on their side, which at this point is very much true.
So this is very unlikely to turn around, certainly very unlikely since everything is political, very unlikely to turn around before the midterm elections.
I think that was a happy note. Anyway, take care and I’ll be back to my regular format of interviews and everything else in a few days. Bye.
