Don’t Be Fooled by the Latest Employment Report
The Biden administration, the Fed and Wall Street all cheered the July employment report last Friday, which stated that total non-farm payrolls rose by 943,000 — 8.4% better than expectations of 870,000 — and the unemployment rate fell 0.5% to 5.4% in July. They also upwardly revised the prior two months by 119,000 jobs.
Rising employment is certainly good news for the economy and living standards, but there is much more to this story that is concerning for the economy.
In this article, we will make these five key points about the current employment situation:
- employment is a lagging economic indicator, so it is not particularly useful in determining the future direction of the economy or financial markets
- money supply growth drives the business cycle and employment
- money supply and employment growth are both slowing now
- overall employment levels remain very weak and are still in recessionary territory
- Federal unemployment benefits have been subsidizing unemployment, but that will change next month
Employment Lags, Money Supply Leads
Employment growth is a lagging economic indicator, as it usually bottoms after a recession has ended. Money supply growth is a leading economic indicator (and actually drives the business cycle), as it usually bottoms before a recession begins.
As Murray N. Rothbard stated in The Mystery of Banking:
For every business cycle is marked, and even ignited, by inflationary expansions of bank credit…bank credit expansion raises prices and causes a seeming boom situation, but a boom based on a hidden fraudulent tax on the late receivers of money. The greater the inflation, the more the banks will be sitting ducks, and the more likely will there be a subsequent credit contraction touching off liquidation of credit and investments, bankruptcies, and deflationary price declines.
Similarly, Ludwig von Mises wrote in Omnipotent Government:
True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.
The graph below shows growth in “Austrian Money Supply” (AMS) — consistent with this definition (although no longer including traveler’s checks, which have been discontinued in the Fed’s database due to limited use these days) — and employment growth. It shows that AMS growth (blue line) bottomed ahead of the last four recessions (shaded gray), while employment growth (red line) bottomed after.
Let’s review the timing of money supply and employment growth around those four recessions.
In July 1989, money supply growth bottomed. A recession started 12 months later in July 1990. The recession ended in March 1991 and employm
Article from LewRockwell