The shortest recession ever – unemployment will be below 6% in November

After US unemployment rose to nearly 15% (in April) I wrote a blog post forecasting unemployment would be back below 6% in November.
 
That got me a lot of attention and a lot of suggestions for bets on the numbers (I have accepted a lot of these wagers).
 
Today, we got the US labor market report for May. It is a massive confirmation on my bullish call on the US labor market.
 
US (non-farm) employment rose by 3 million in May and unemployment dropped to 13.3% in May from 14.7% in April. This is much better than the consensus expectation of an increase in unemployment to 19%.
 
The US recovery is well underway. The markets have been right and the-world-is-coming-to-an-end-pundits have been wrong.
 
Meanwhile market inflation expectations continue to rise as well and even though inflation expectations are still below where we where in late February it is clear that the US economy is not heading for deflationary depression.
 
This will in the end will be the shortest US recession on record.
The lockdown of the global economy has been a very bad and unplanned vacation, but particularly the US economy is recovering very fast from it.
In the past 12 years I more or less constantly been calling for further monetary easing both in the US and the euro zone as inflation expectations have remained below the Federal Reserve’s and the ECB’s 2% inflation targets.
However, I am now for the first time in more than a decade beginning to think that the risk is that the Fed could err on the upside in terms of overshooting its inflation target.
I am not too alarmed by this and and I am not overly concerned about a repeat of the mistakes of 1970s (yet), but I am beginning to think that we could see the Fed being forced to reverse cause a lot faster than most commentators are now predicting.
In fact I have over the past week (on Twitter) been arguing that we might even get a rate hike before the end of the year (yes, this year…) from the Federal Reserve.
Markets are of course not yet priced for that, but it is clear that is the direction in, which we have been moving in recent days.
US fiscal policy has been eased aggressively in response to the lock-down crisis and the Fed has at the same time acted decisively to eas monetary conditions. As the US economy is re-opened this easing – both fiscal and monetary will have to be reversed.
Massive government cash transfers have caused a major spike in growth in US personal incomes as the graph below shows.
Historically there has been a fairly strong positive correlation between changes in the Fed’s policy rate and growth in personal income.
However, recently the Fed has been cutting the policy rate and introduced quantitative easing, while personal income growth has spiked.
Obviously, the spike in income growth is a one-off and unemployment remains very high, but if I am right about my call on US unemployment then the Fed very soon will have to hike rates and it could be before the end of the year.
The timing of course will depend both on inflation expectations and on the speed of the recovery in the labor market, but for now I certainly think a rate hike this year is more than likely.
Fed fund target

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Contacts:

Lars Christensen, LC@mamoadvisory.com, +45 52 50 25 06.

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6 Comments

  1. Matthias

     /  June 6, 2020

    Good to hear that you accepted bets on your prediction!

    Reply
  2. “The US recovery is well underway. The markets have been right and the-world-is-coming-to-an-end-pundits have been wrong.”
    Let’s hope that you are right.
    However:
    “History confirms that stocks make the wrong call on future recessions almost as often as they prove a bellwether. “
    https://fortune.com/2020/03/13/stock-market-recession-predictors-2020/

    Reply
  3. Here: https://mcusercontent.com/78302034f23041fbbcab0ac6d/files/c1389469-62ad-4d03-bbaf-d4f1ada59772/Monthly_e_mail_2005_Global_money_round_up.pdf
    Are the thoughts of Monetarist {‘Thatcherite’, rather than ”Modern’}.
    “The situation is evolving rapidly,…but it is already clear that the United States of America may in 2020 or early 2021 record the fastest increase in the quantity of money, broadly-defined, in its peacetime history. The main news this month is that the subjunctive is no longer the right tense to use. In April US M3, as estimated by the Shadow Government Statistics consultancy, rose by 7.5%, while the annual increase in M3 reached 20.5%. This was the fastest increase in US peacetime history. Federal Reserve data on deposits are already available for the first two weeks of May. The month of May will probably see another M3 advance of 3% – 4%, so that the annual rate of increase moves up to 23% – 24%. ”
    From a later ‘bulletin’
    “The evidence on the relative stability of the velocity of circulation implies that – at some point in the next two or three years – the annual increases in US nominal GDP and the price level will move into the double digits.”

    Reply
  4. Moe ‘thoughts’?
    “In the year to May the M3 measure of money – which corresponds to the M2 measure favoured by Milton Friedman and Anna Schwartz in their 1963 A Monetary History of the United States – increased by just over 25.5%. This was the highest increase in the quantity of money in modern American peacetime history. . . .
    Today the situation is very different. Banks are not being asked to raise more capital and, on the contrary, capital adequacy rules have been relaxed. (Quite right too in the circumstances.) Particularly in the USA, and to a lesser extent elsewhere, governments have ballooned their budget deficits and financed them from banking systems, creating extra money balances. QE exercises have also been undertaken, with further additions to the quantity of money over and above those due to monetary financing of the budget deficit. The fiscal and monetary sprees have been so huge and permissive that broad money growth rates have risen to extraordinary levels. As I have pointed out above, and about which I have in fact been hinting for some weeks, the USA now has the highest annual growth rate of the quantity of money in its peacetime history. So – unlike late 2008 and early 2009 (and indeed for a few years thereafter) – I am very worried about a sequel in which annual inflation takes off into the double digits, at least in the USA. The chart above speaks for itself.“
    https://mailchi.mp/8f126f390556/which-economic-thoughtcomes-out-best-from-the-last-decade-1336071?e=260ed9002a

    Reply
  5. Michael

     /  November 12, 2020

    Sad that I missed the wagers you were placing based on the post. Seems like some commenters (including myself) were right. The last reading of the unemployment rate before the election (September numbers) show 7.9% unemployment. Even October numbers are at 6.9%. Maybe given 1-2 more months you would have been right.

    Reply

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