It’s a miracle.
At least, that’s the thinking of a growing number of the world’s greatest minds as they ponder the thorny subject of chucking people on the unemployment scrap heap.
In fact, they’ve even coined a new term for it: Immaculate Disinflation.
Once again, in what’s become a feature of this weird economic cycle, the unpredictability of the real world is making a mockery of the economic textbooks.
Rarely have we seen such a brutal round of interest rate hikes.
And yet, while they’ve had the utterly predictable effect of tipping many major economies into recession, there’s one important area that is defying conventional wisdom.
People are holding onto their jobs, here and in other developed nations.
True, employers aren’t scouring the streets for anyone merely dressed and on their feet as they were immediately after pandemic lockdowns were lifted. But they’re not laying waste to workers in their thousands either.
This has never happened before. While workers tend to be laid off en masse fairly late in the cycle, once it’s become obvious that a recession is at hand or even upon us, this time the sackings have been delayed.
The question on the minds of most economists is whether this is a temporary reprieve or a permanent change in our behaviour.
When it comes to the public arena, central bankers are more than happy to take the kudos for some mystical or even divine powers in engineering this unexpected feat.
Privately, however, they’ve been flummoxed by the shift. Not only does it confound decades of thinking, but it has confused their strategy.
For very recently, despite all the talk about maintaining “full employment” and holding on to job gains, most have been silently praying for unemployment to go higher, to confirm they’re on the right path to slaying the inflation dragon.
The full employment myth
It’s been an article of faith for decades. In the choice between jobs and inflation, taming consumer prices comes first. Jobs are just collateral damage. Not that any central banker would ever openly admit that.
Ever since Kiwi economist Bill Phillips came up with the idea of the Phillips Curve in 1958, there’s been an idea that there is a natural rate of unemployment that will act to keep prices in check.
If prices get out of hand, the medicine that increasingly has been prescribed since the 1970s has been to jack up interest rates, slow the economy and put workers out of a job. If there are enough unemployed workers, there is more competition for jobs and less wage pressure. And that means firms will be less driven to put up the price of their goods and services.
So, the idea of full employment no longer exists. Instead, it’s been replaced by the “Non Accelerating Inflation Rate of Unemployment” or the NAIRU, the elusive level of despairing workers that will keep prices in check.
The problem is, no-one knows exactly what the level is. For years, it was assumed to be 5 per cent. Post-pandemic, it was lowered to 4.5 per cent. And when unemployment dropped into the 3s, politicians and exasperated central bankers gave up trying to guess.
At her first post-RBA meeting press conference for the year last month, governor Michelle Bullock admitted the bank didn’t know exactly where the level was.
Last week, after cracking the door on potential rate cuts, she spoke of continued “tightness” in the jobs market. That’s in-house talk for too many people in jobs.
A few days later, after the jobless numbers dropped from 4.1 per cent to 3.7 per cent, her worst fears were realised with confusion growing, particularly about what to do next.
Have we reached Nirvana, where Bill Phillips and his often wrong curve have been turfed, where unemployment and inflation can subside together? Or is there another bout of price rises lurking, just waiting to break out?
Make America Unemployed Again
She’s in good company.
US Federal Reserve chairman Jerome Powell reckons it would require a miracle to bring inflation into check, down to 2 per cent, without causing a spike in jobless numbers.
Last June, he said the key to bringing down inflation permanently was for “continuing loosening in labour market conditions”, central bank speak for putting workers on the streets.
America’s inflation is now sitting at 3.2 per cent. That’s a touch higher than February but way below the 9.1 per cent peak in June 2022. Despite that massive drop, after pushing interest rates to 5.25 per cent, unemployment remains at just 3.9 per cent.
Again, that’s a little higher than the previous month but at historically low levels despite the ramp-up in rates.
Not everyone is a convert to the new creed. Even Joe Biden’s economic advisor Jared Bernstein poured cold water on the new evangelists.
“I wouldn’t call this disinflation immaculate,” he told CNBC at the Fed’s Jackson Hole conference. “There’s a good question as to what’s around the corner at the last mile.”
As the US elections near, however, there is likely to be less objective analysis of the potential pitfalls facing the economy from within the government camp.
Another former senior Federal Reserve official Dennis Lockhart last week begrudgingly admitted that it might just be possible for unemployment to stay below anticipated levels.
“The current environment has factors at work that are really quite positive,” he told Bloomberg.
While progress on inflation had slowed, unemployment had remained low, he said, which helped maintain economic confidence.
“Up until now, no recession, and the Immaculate Disinflation story has been the real story.
“We’ll see if that continues, circumstances may be changing. It’s hard to tell.”
God or mammon?
There’s a lot riding on this new economic religion.
It’s fired up a fervour for every conceivable store of wealth, from gold to bitcoin. Stock markets globally are soaring, punching through new records. And real estate, that perennial punt for Australians, is again on the march with the hint that interest rate cuts are coming.
But much of this depends on jobs. Higher unemployment hits consumption, business profits, tax receipts and even the banks which are exposed to rising bad debts, which so far remain historically low.
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The Financial Stability Review released by the RBA last week highlighted a growing number of Australian households spending more than they were earning just to keep their heads above water. About 5 per cent of mortgage holders were outlaying more on essentials and repayments than they earned.
While the bank admits the jobless rate is likely to rise, given the population is growing faster than jobs are being created, it anticipates that “full employment” may be more benign than in the past.
The “full employment” rate is actually the unemployment rate. What that might be, we don’t know. Neither does the RBA.