Charles Steindel

State payrolls were little-changed in March. Only 2 states (Massachusetts and Kentucky) saw statistically significant increases, and a number saw point declines. The largest numerical gain was Texas’s 28,600. The sum of the changes in all the states was a modest 177,300. 

18 states saw statistically significant declines in unemployment, none larger than the .3 percentage point drops in New Hampshire, Oregon, and West Virginia. DC experienced a .1 percentage point increase. Nevada continued to have the highest unemployment rate, 5.5 percent. The two Washingtons (DC and the state) were the only other places with unemployment rates as much as a point higher than the national average of 3.5 percent. Alabama, Nebraska, New Hampshire, South Dakota, and Wisconsin were at least a pointer under the national rate, with that n South Dakota an incredible 1.9 percent.

Puerto Rico’s unemployment rate held at 6.0 percent, and its job count was essentially unchanged.

State Labor Markets in March 2023

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Paul L. Kasriel

In an April 16, 2024 Bloomberg News article entitled “**[What If Fed Rate Hikes Are Actually Sparking US Economic Boom?](https://www.bloomberg.com/news/articles/2024-04-16/booming-us-economy-inspires-radical-theory-on-wall-street?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTcxMzM5MTUyNSwiZXhwIjoxNzEzOTk2MzI1LCJh)**”, it is argued that the Fed’s increase in the federal funds rate from 0.08% in March 2022 to 5.33% in July 2023, which, in turn, pushed up other interest rates, stimulated US domestic aggregate demand for goods and services by increasing interest income to holders of fixed-income assets. Wow! This novel hypothesis, if valid, turns monetary policy theory on its head.

Let’s look at some data. As can be seen in Chart 1, there does indeed seem to be some positive correlation between the level of the federal funds rate and the level of personal interest income. For example, when the Federal Open Market Committee (FOMC) hiked the federal funds rate from the beginning of 2016 through the first quarter of 2019, personal interest income moved up sympathetically. Although personal interest income had started increasing in 2014, before the FOMC had begun raising the federal funds rate. Similarly, as the FOMC began hiking the federal funds rate in 2022, personal interest income starting rising, too. So far, so good for this hypothesis that FOMC federal funds hikes raise personal interest income.

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But, when we compare personal interest income to total personal income, the story changes (see Chart 2). As the federal funds rate increased in 2016 through early 2019, personal interest income as a percent of total personal income moved up only marginally. In the 2022 through early 2024 period, the ratio of personal interest income to total personal income did move up, but only slightly higher than the level that prevailed in 2020, when the federal funds rate was effectively zero percent, and considerably below the 2019 level, despite a much higher federal funds rate in the more recent period. If higher personal interest income were responsible for the recent resilience in aggregate domestic demand, personal interest income as a proportion of total personal income would be higher. Alas, another beautiful theory spoiled by ugly facts.

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Let me offer a different hypothesis as to why US aggregate demand has remained resilient in the face of the FOMC’s federal funds rate hikes starting in 2022. This hypothesis was hinted at by one of my readers, Tague Goodhue, Managing Partner at Pantheon Investments, LLC. A year or so ago, Mr. Goodhue observed that although the growth in thin-air credit (the sum of the monetary base and loans/investments at depository institutions) had slowed dramatically, the amount outstanding of thin-air credit remained exceedingly high, such that the ratio of nominal GDP-to-thin-air credit, or the “velocity” of thin-air credit was comparatively low in terms of the period from the recovery of the Great Financial Crisis up until the Covid negative supply shock. This low velocity on thin-air credit implied that the public’s demand to hold rather than spend the resulting liquid assets created by thin-air credit was relatively high. If I had paid more attention to Mr. Goodhue’s observation I might not have made one of the worst calls of my career, including my retirement. That bad call being that a recession would begin in 2023 because of the precipitous slowing in the growth of thin-air credit. I won’t make that mistake again, just a different one.

As I mentioned, the creation of thin-air credit results in the creation of liquid assets. Plotted in Chart 3 are quarterly observations of thin-air credit (the blue bars) and quarterly observations of households’ and nonfinancial businesses’ holdings of deposits (demand, saving and time) and money market mutual fund shares (the red line). As you can see, starting in Q2:2022 through Q4:2024, the levels of thin-air credit and household/nonfinancial business holdings of deposits and money market mutual fund shares are almost equal.

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Now, let’s look at the relationship between the private nonfinancial sector’s holdings of deposits and money market mutual fund shares and private Gross Domestic Purchases (private aggregate demand). This is plotted in Chart 4. It is, in effect, the inverse of a velocity concept. As can be seen, as of Q4:2023, the private nonfinancial sector’s holding of deposits and money market mutual fund shares as a percent of nominal private Gross Domestic Purchases remains high relative to percentage levels in years prior to the Covid negative supply shock of 2022. Thus, the private nonfinancial sector as of the end of 2023 still held an abnormally-high amount of liquid assets, assets that could easily be used to purchase goods, services and assets.

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As an aside, the data plotted in Chart 5 show that growth in a narrower variant of thin-air credit has picked up in the past two quarters, including its bank credit component. Could it be that the Fed’s monetary policy has eased in the past two quarters despite the fact the federal funds rate has been held steady at 5.33.

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In sum, I would argue that the “new” view on how monetary works, namely that higher federal funds rates are stimulative, is utter nonsense. (I was going to use another term, but this is a family publication). Rather, the massive amount of liquidity that the Fed created in reaction to the Covid negative supply shock has not disappeared in either an absolute sense, but more importantly in a relative sense. This implies that the private nonfinancial sector, at least through Q4:2023, still has excess funds that it can use to purchase goods, services and assets.

Another Beautiful Theory Spoiled by Ugly Facts

Joseph G. Carson

The Federal Reserve's persistent use of the 'forward guidance' policy tool, which involves offering forecasts of growth, inflation, and policy rates to influence financial market conditions, is a misguided approach. This tool operates under the assumption that the Fed can accurately predict the future, a notion that is inherently flawed given the unpredictable nature of economic conditions.

In 2023, policymakers used its forward guidance policy tool to signal an end to its tightening policy cycle, thinking it had or would, in time, arrest the cyclical inflation cycle. At the end of the year, it went further, as it offered forecasts for 2024 that promised three official rate cuts.

Yet, in hindsight, forward guidance backfired. Promises of no more rate hikes followed by promises of lower official rates triggered a 100-basis drop in long bond interest rates and double-digit increases in equity prices. The dramatic change towards much easier financial conditions has helped produce economic results that the Fed was not expecting in its forward guidance. (Note: Q1 real GDP growth is estimated at 3%, while core consumer prices rose at an annualized rate of 5%, compared to forward guidance growth estimates of 2% and core inflation of 2.4%).

The challenge for policymakers is how to navigate the modification or discontinuation of the forward guidance policy tool. Forecasts from forward guidance are updated only four times a year, with the next update scheduled for the June meeting. While the Fed chair can provide an informal update at any time, official policy announcements are made at regularly scheduled meetings. A sudden deviation from the last forecast could disrupt the financial markets and undermine the Fed's credibility, if it still has any.

Yet, the problem with "forward guidance" goes well beyond the announcement dates. Policymakers offer forecasts on growth, inflation, unemployment, and policy rates for two years and a longer-run equilibrium level for each. And, regardless of whether current economic conditions are too hot or soft or inflation is too low or high, the Fed's forward guidance forecasts say, through the magic of monetary policy, growth, unemployment, and inflation will gravitate to trend.

Like everyone else, the Fed has had difficulty forecasting what the economy will be like in the next year, let alone in two or three years. Yet, unlike other forecasters, policymakers link an official rate path to its forecasts. That linkage makes official policy more predictable. However, it also creates the potential for a significant easings in financial market conditions, similar to what occurred since late 2023, long before policymakers achieved their intended outcomes.

Policymakers spent time "normalizing" official rates, and now they need to "normalize" their policy statement, making it shorter and with fewer promises. Eliminating forward guidance would also be a positive step because even though it implies "it all depends," it still drives market expectations of official rates.

The Fed's "Big" Mistake---- Continuing to Use Its Forward Guidance Framework As A Policy Tool

I enjoy examining data. It used to be a hobby that I got paid to do. Now, it is just a hobby. Below are some random sets of data of that I found interesting. Perhaps some others will, too.

As shown in Chart 1, starting in 2022, household interest payments as a percent of their after-tax income (Disposable Personal Income) started rising after declining in 2020 and 2021. By Q4:2023, household interest payments as a proportion of after-tax income had moved up to 5.4%. This compares with 5.0% in Q4:2019, just before the Covid pandemic hit the US. Notice that the main driver in of this proportional increase in household interest payments has been non-mortgage debt. With many 30-year home-mortgage rates locked in at around 3% in 2020 and 2021, households have been able to increase their spending relative to their after-tax income by increasing consumer loans, such as credit card and auto debt. Although household debt-service ratios are rising, they are a far cry from those that obtained just before the onset of the Global Financial Crisis, but …

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… banks are starting to report rising delinquency rates on consumer loans (see Chart 2). For all insured commercial banks, the delinquency rate on consumer loans in Q4:2023 reached 2.62%, surpassing the 2.47% of Q1:2020. Again, 2.62% is a far cry from the 4.50+% delinquency rates experienced in 2009. The biggest delinquency problem seems to be housed in smaller banks (the blue line in Chart 2). At 2.97% in Q4:2023, the consumer-loan delinquency rate for smaller banks is closing in on 3.17% set in Q4:2008.

The Federal Reserve Bank Quarterly Report on Household Debt and Credit shows balances delinquent at least 30 days but less than 90 days as a percent of outstanding balances have been rising for both credit card (blue bars) and auto loan (red line) debt (see Chart 3). For both credit card and auto loan debt, newly-delinquent debt balances as a percent of total outstanding balances in Q4:2023 were the highest since 2011.

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The Federal Reserve remits to the US Treasury the amount of its revenues that exceed its expenses. The Fed’s principal source of income is the interest it receives on the securities it owns and loans that it made. Up until October 2008, the Fed’s principal recurring expenses were the salaries paid to the largest staff in the world of crack economists, salaries paid to other harder-working support staff, supplies and utilities. Starting in October 2008, the Fed began paying interest on the reserves it created. These reserves are held by depository institutions, primarily commercial banks. As of February 2024, 81.3% of the Fed’s portfolio of Treasury securities had a maturity greater than one-year. Plotted in Chart 4 are the monthly average interest rates on the interest the Fed pays on the reserves it has created, the 1-year constant-maturity Treasury security, the 5-year constant maturity Treasury security and the 10-year constant maturity Treasury security. Starting in December 2022, the interest rate the Fed paid on reserves exceeded the yields on Treasury 5- and 10-year securities. In other words, the Fed was experiencing negative carry on its Treasury portfolio.

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The negative carry that the Fed experienced on its portfolio in 2023 resulted in a net operating loss, which, in turn, meant that the Fed was unable to remit funds to the Treasury for the first time since at least 1954 (when the series began). Rather, the Fed, in effect, incurred a debit balance with the Treasury in 2023 to the tune of $115.7 billion, which represented about 1.8% of total federal expenditures in calendar year 2023 (see Chart 5). The Fed will not be remitting any funds to the Treasury going forward until it has a cumulative net operating surplus equal to $115.7 billion and any accumulated further losses. When the Fed does not remit funds to the Treasury, the Treasury either has to borrow or tax more to fund a given level of expenditures.

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The Fed’s net operating deficit in 2023 also affected the financial sector’s profits as calculated in the GDP accounts. According to the GDP accounts, the US financial sectors profits slipped by $41.8 billion in 2023 compared to profits in 2022 (see Chart 6). But, this decline in 2023 financial sector profits was due to the Fed’s loss of $143.8 billion, as calculated in the GDP accounts. After excluding the Fed’s 2023 loss, private financial sector profits actually increased by $157.3 billion in 2023 vs. 2022. All that interest paid by the Fed on reserves held by depository institutions probably boosted the 2023 profits of the private financial sector.

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As an aside, the Fed started paying interest on reserves in October 2008 in order to induce banks to hold an excess of reserves so as to prevent the federal funds rate from falling below its target rate of 1.00%. By December of 2008, the Fed had dropped the lower bound of its target range for the federal funds rate to zero %. So, the Fed could have eliminated paying interest on reserves at that point. But, if the Fed had ceased paying interest on reserves in December 2008 after having instituted the payment in October 2008, would not that have made the Fed look to be incompetent? Don’t get me started on why the Fed targets an interest rate rather than a monetary quantity.

Lastly, the month-to-month increase in February 2024 Personal Income of 0.28% seemed small to me considering that Employee Compensation increased by 0.70%, the largest monthly increase since January 2023. The mystery was solved when I looked at the component of Personal Income, Receipts from Assets, which includes interest and dividend payments received by households. This component of Personal Income contracted by 2.07%, not annualized, in February 2024 (see Chart 7). Interest income contracted by 0.39%, whilst dividend income contracted by a whopping 3.66%, again, not annualized. When Receipts from Assets is excluded, Personal Income in February increased by 2.35%, not annualized. So, one issue regarding the near future behavior of Personal Income is whether or not the large decline in Income Receipts from Assets was a one-off event. I think so. Regarding Employee Compensation in March 2024, we will get some pertinent information on this with the release of the March Employment Situation on Friday, April 5, 2024. As always, be aware that these are preliminary data. They will revised many times until we know the “true” state of Personal Income in February 2024 or March, for that matter.

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April Odds and Ends

State real GDP growth rates in 2023:4 ranged from Nevada’s 6.7% to Nebraska’s  0.2%. Growth tended to be weaker in the center of the nation, with agriculture being a major drag.

The distribution of personal income growth was comparable to real GDP with Nevada again on top with a 6.7% growth rate, while Iowa and North Dakota tied for last with each having a growth rate of 0.8%. Over the last few years, the extension and withdrawal of federal transfers connected to the pandemic often grossly distorted movements in state personal income, and the ranking of states. This has become less evident in recent quarters, though the range of annual growth rates for transfers in 2023:4 did run from 8,1% in Mississippi to -5.0% in Arizona. The large drop in Arizona certainly had a visible effect on its overall income growth; Mississippi’s large gain was less meaningful, since other income components there also grew substantially.

State Labor Markets in March 2023

Charles Steindel

More Viewpoints

Another Beautiful Theory Spoiled by Ugly Facts

The Fed's "Big" Mistake---- Continuing to Use Its Forward Guidance Framework As A Policy Tool

April Odds and Ends

State GDP and Personal Income in Q4 2023