Moneybeat: The Phillips Curve and the jobs report

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now. David, good morning!

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: All right, so the jobs report came in last week. It beat expectations with a jobs-added figure of 200,000+. But also previous reports from April and May had to be revised down. And the unemployment rate ticked up over the four percent mark. Those are the headlines. You’re better at reading these, David, what did June tell you?

BAHNSEN: Yeah, it was an okay report. It wasn’t great, it wasn’t terrible. Average hourly earnings have cooled a bit. They were up 3.9% versus a year ago. We had been averaging a little over 4% versus a year ago. The main issue was that the April and May numbers had downward revisions of 111,000 and the labor participation rate sticking in there at 62-1/2, you just were kind of looking for certain offsets to some of the more negative numbers, and they weren’t really there. 

Nobody would say it was a terrible report, but it certainly didn’t do anything to those “Phillips Curvers” out there that are so worried about a too-hot jobs market—those that believe wages are growing too much and too many jobs are being created, and all these things are inflationary and need the Fed to keep rates really high. There’s nothing in the data suggesting that. I think that there are signs of the labor market slowing, but they’re not slowing in any kind of disastrous way. And I continue to believe that the optics the Fed needs are there to begin cutting rates after the election.

EICHER: So, it’s interesting, David, we talk a lot about this, that the Fed needs certain “optics” in order to move consistent with publicly available data. But you’ve said many times that the so-called Phillips Curve model—which is the predicate for interest rate increases as the policy tool to fight inflation—you’ve said the Phillips Curve is a discredited theory, maybe outdated or maybe never should’ve been considered credible in the first place. What’s the chance that the Fed would abandon the notion of the Phillips Curve as a driver of policy on interest rates?

BAHNSEN: Well, yes, bad ideas eventually get priced away over time, all the time. The answer to your question about whether or not it is outdated now, or maybe it was always outdated, is that it was always outdated. It was never true. There’s never been a time where the existence of full employment or good employment is inflationary. There are times when, coincidentally, a lot of people might have jobs, and inflation may be high, but that’s because inflation is always and forever a monetary phenomena, as Milton Friedman taught us. So you can have times in which money supply growth outpacing production of goods and services, and that could be inflationary regardless of how many people have jobs. What is not true is that there is an embedded tension between employment and inflation, which is what Phillips Curve advocates believe. 

Now Jay Powell said with me just feet away from him at a New York luncheon in October of last year that for whatever reason, the Phillips Curve model does not seem to be applicable right now to current conditions. So even though I don’t believe you’d get Jay Powell or some of the other Federal Reserve governors to agree with my permanent evergreen rejection of the theory, even the Fed themselves are saying that right now their model is not working with a Phillips Curve approach. 

My answer to that, of course, is that any model that works sometimes and not other times is not a model. It’s a theory. It is a conjecture, but it’s not a model. And so either way, when I refer to the Fed needing cover, looking for optics, it simply has to do with the premise I’ve had for a very long time now, that the Fed believed they could get away with higher rates and help purge some of the excesses out of the system without a lot of collateral damage. That was a big risk. Most economists didn’t believe it in ’22-’23 they expected it would create a recession, because that kind of tightening almost always does. We now have answers as to why it didn’t. And I have believed for some time that the Fed would be perfectly happy to take a victory lap, to have gotten a lot of excesses purged, to have tightened monetary policy to some degree, and have not provoked a recession. But to tempt fate by staying unnaturally high unnecessarily, I simply don’t believe they will do that, because the Fed is well aware of the consequences of overstaying their welcome with unnaturally high rates.

EICHER: I realize it was a short market week with the holiday. Anything worth noting in the markets or other economic data we should know about?

BAHNSEN: You know, Nick, I thought that the ISM non-manufacturing, the ISM services, was interesting. And as I talk a lot on the show about certain data points that come monthly, and even more so, certain data points that come weekly, when something is a big enough outlier. I always do feel it is useful to allow a little series of data to come to start gaging three or four week rolling averages. 

In this case, three or four monthly data points might be useful. Because nobody would have expected that you’d have services contracting two of the last three months. It was supposed to be up last month, and it was down, and in both cases, significantly so relative to expectations. 

The business activity component of their measurement here was really quite down. Now, it was very anomalous, and that means I want more data. But that’s another issue the Fed will be looking at, Nick. If ISM manufacturing has been down something like 18 of the last 19 months, and ISM services are now down two of the last three months, when they’ve basically been up most of the last year and a half, that could indicate weakening economic activity and a lack of business activity materializing, that could be very concerning to the Fed as far as the supply side of the economy goes. So, I’m watching that, and we’ll have to have a little more to say about it next month.

EICHER: For defining terms, I’d like to go back to the jobs report. This is one of many regular reports the federal government generates. These are all dutifully reported on the business wires. The jobs report, of course, is from the Department of Labor, the Bureau of Labor Statistics. The government employs economists to monitor and measure and report, but how do they gather this info. and why is tracking these things important?

BAHNSEN: Well, I think that there’s a lot of reasons, whether you’re looking at various factors in the Treasury Department, the Federal Reserve, the Commerce Department, the Labor Department, there is a need for data. And in an economy of 335 million people, there’s a lot of complexity, and some of the data may be of interest to policymakers that are doing policy in an arena I don’t think they should do policy. 

I wouldn’t legitimize across the board, all of the functions government is taking on, but I would legitimize the need for data. The Bureau of Labor Statistics is but one example. But the amount of economic data that is available from various governmental agencies and bureaus is vast, from trade to prices to labor to wages to imports/exports. 

You know, I mean that we got the trade deficit number last week as well. So, all of these things are basically done with surveys and the various statistical rules, formulas, and methodologies that get applied to survey data and over the years have proven to be reasonably reliable. There’s outliers, there’s adjustments, there’s seasonality factors. It’s not perfect. It couldn’t be perfect from any source, but the vast majority of private actors that have significant skin in the game have been reasonably content over the years. 

The fact that some are always looking for a kind of partisan conspiracy theory are somewhat chastened by the fact that the different political parties are in charge at different times, and so the data and the methodology doesn’t change from one administration to the next. And so that tends to neutralize some of those concerns when it comes specifically, Nick, to BLS. 

The monthly jobs report is an attempt to look at this percentage of people that got a new job the month before, divided by the pool of people looking for a job. The labor participation force is measuring the amount of people who have a job or want a job, divided by the addressable population. So, they’re measuring two different things. 

And then the weekly jobless claims is measuring new unemployment claims, and it is not a federal number. It is reported by 50 different states into a federal registry, and so the provider of the data are 50 independent states. So there’s a number of different studies, a number of different surveys, and I look at all of them all the time as any serious data analyst ought to do.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

Check out David’s latest book, Full Time: Work and the Meaning of Life, at fulltimebook.com.

Have a great week, David!

BAHNSEN: Thanks so much, Nick.

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