One Person’s Spending Is Another’s Income, and Other Lessons from the Fed’s Balancing Act

Last week, the Department of Labor released its latest data on unemployment insurance claims. The weekly claims increased by 7,000, which is good news for the Fed: It means their policies are working. However, at around 198,000, jobless claims are still near below the pre-pandemic 2019 average of 220,000, according to The Wall Street Journal.

The Federal Reserve has two goals: to maintain stable prices and to maintain low unemployment. Right now, the two are hard to balance. Maintaining stable prices — that is, reducing inflation — requires increasing interest rates. That cools demand. However, cooling demand comes at a cost, namely, an increase in unemployment.

At least, that’s the theory. At the moment, reality might be telling a different story, and Fed policymakers are scratching their heads.

For the last year, the Fed has been increasing interest rates from near zero to about 4.5 percent, which increased your three-percent mortgage loan rate to around eight percent. Though the process takes time to work its way through the economy, that rate increase hasn’t so far impacted the unemployment rate. One indicator policymakers have their eagle eyes on is the number of weekly jobless claims, or how many people are seeking unemployment benefits as a result of recently losing their jobs.

What it means

Of course, as with all data, it’s important to understand what comprises individual statistics. Are the 198,000 weekly jobless claims primarily in one particular industry or region of the country? You’re likely reading in the news about layoffs, for example, but many of them have come from the tech sector, and many claims have been filed in the Northeast and in California. Or are those people with claims quickly finding jobs, making that figure misleading? Many recently laid-off workers, for example, are finding jobs elsewhere before needing to draw from unemployment benefits — it seems there is still more demand for labor than there is supply. The latest Job Openings and Labor Turnover Summary, or the JOLTS report, shows that there are about 10.8 million job openings. But there are only 5.9 million unemployed people. That means there are nearly two open jobs for every person looking. The current unemployment rate is 3.6%, near the lowest since 1969.

Even the quits rate, which “can serve as a measure of workers’ willingness or ability to leave jobs,” according to the JOLTS report, is still uncomfortably high for policymakers. A high quits rate shows that employees feel confident about their future job prospects and don’t mind giving their boss the deuces. That rate only decreased slightly in the latest report.

In short, the job market is still red hot. And for economists wanting to slow down the economy, a strong labor market is grease on the brakes.

Why it matters

What to do with all this data? The data tells economists that, to slow inflation, interest rates will have to rise even further, perhaps even faster. But here’s the rub: Further increasing rates not only increases unemployment but also increases instability in the financial system.

We discussed last time how the current banking crisis is unfolding, and why it matters for you and me. We noted how changes in the economic landscape take time to filter through the economy — from changes in interest rates to how that affects the deployment of capital, to the banking system, housing, and individual jobs — so we have seen how it’s important to assess the situation from both ends.

On one end, we’re seeing how higher rates have drastically slowed the amount of capital in the system in the form of venture capital — that’s tech — as well as capital distributed through the economy in the form of credit — that’s banking. With strains appearing in banking, it’s only a matter of time until banks tighten their lending, which dries up capital available for loans for homes or cars or even your new computer monitor. Many have pointed to increased debt loads as a sign of this credit crunch, but as I wrote in my personal newsletter weeks ago, that figure has more to do with demographics than finance.

On the back end, take note of how you and others are experiencing their job situation. Is it stable? Are others getting laid off? Is your church family struggling to hang on to their jobs? Can they find new ones? Are they turning to gig work to make ends meet?

Be sure to check out the latest economic data, but also ask around to get a feel for how the labor market is shaping up. And keep in mind that one person’s spending is another’s income. As those around you cut back their spending due to a lack of jobs, those cuts will likely have an effect on others’ income, and the downward spiral begins.

The employment situation matters on a macroeconomic scale as well as a microeconomic scale, as micro as you, dear reader.

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