The Biden administration, the Fed, and Wall Street all cheered the July employment report on Friday, which stated that total nonfarm payrolls rose by 943,000—8.4 percent better than expectations of 870,000—and the unemployment rate fell 0.5 percent to 5.4 percent 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 the Austrian Money Supply (AMS) metric—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 the four recessions shown in the graph.
In July 1989, money supply growth bottomed. A recession started twelve months later, in July 1990. The recession ended in March 1991 and employment bottomed three months later, in June 1991.
In July 2000, money supply growth bottomed. A recession started in March 2001, eight months later. The recession ended in November 2001. Employment growth bottomed in February 2002, three months later.
In September 2006, money supply growth bottomed. A recession started fifteen months later, in December 2007. The recession ended in June 2009. One month later, in July 2009, employment growth bottomed.
In August 2019, money supply growth bottomed. A recession started in February 2020, six months later (although significantly driven by the covid panic). The recession officially ended only two months later in April 2020. That same month, employment growth bottomed.
Note: there was a significant money supply slowdown in 1995 that did not result in a recession, proving that no economic indicator is perfect.
This year, money supply growth peaked in February at a record high +39 percent and has since fallen to “only” +10 percent in June. Employment growth has followed, having peaked in April at nearly +11 percent and falling to +5 percent in July.
Employment Remains in Recessionary Territory
Nearly 22.4 millions jobs were destroyed during the initial covid panic in March and April 2020, more than double the 8.7 million jobs lost in the entire Great Recession. About 16.7 million jobs have returned in the past fifteen months, leaving 5.7 million more people jobless now than in February 2020, which is down 3.7 percent since then.
As shown in the graph below, the four-week moving average of initial unemployment claims (IUCs) had been running at about 215,000 per week before the covid panic in 2020. IUCs reached a high of 5.3 million in mid-April 2020, eight times higher than the Great Recession peak of 659,250 at the end of March 2009. IUCs have declined to 394,000 recently, which is still over 80 percent higher than before covid. It is concerning that IUCs have stopped declining and have been flattish the past two months.
The Employment-Population Ratio peaked in April 2020, at the top of the tech bubble, at 64.7 percent. It fell to 58.3 percent in December 2009, after the Great Recession had ended. It increased to 61.1 percent in February 2020 before falling to 51.3 percent in April 2020. It has risen back to 58.4 percent, still 2.7 percentage points below February 2020 levels and near the Great Recession lows.
Government Is Subsidizing Unemployment
Job openings are at record highs of 9.2 million, which is over 30 percent higher than in February 2020.
Why are job openings so high? There are many reasons relating to the covid panic, including structural job shifts resulting in mismatched skills for many workers, schools not reopening, which requires many parents to stay home to take care of their children, as well as many people still being afraid to work around others due to covid fears.
However, if it were not for more generous unemployment benefits, many people would have to get back to work to pay their bills. Due to covid, the federal government is providing an additional $300 per week in additional unemployment benefits paid on top of regular state unemployment benefits. The federal government also provides benefits for self-employed workers, freelancers, and independent contractors, who do not qualify for state unemployment benefits. As with any subsidy, this leads to more of what is being subsidized, which in this case is unemployment.
As Mises wrote in Human Action:
Assistance granted to the unemployed does not dispose of unemployment. It makes it easier for the unemployed to remain idle.
Rothbard also explained this basic truth of economics, based on the law of supply and demand, in Man, Economy, and State, with Power and Market:
[G]overnmental unemployment relief, often supposed to help in curing unemployment, has the precisely reverse effect: it subsidizes and intensifies unemployment.
It has been estimated that people who were previously earning less than $34,000 annually would make more money by collecting unemployment benefits than by going back to work.
That is nearly 50 percent of the workforce!
These federal unemployment benefits expire in early September, so we will likely see a surge of people returning to work after that.
But in the meantime, these unemployment subsidies have lowered living standards for all Americans, not only due to the taxes, money printing, and borrowing the government has undertaken to pay for them, but also due to the fewer goods and services that have been produced as a result of millions of people not returning to work. We are all poorer as a result.
As Rothbard summarized in Man, Economy, and State, with Power and Market:
If an economy is to exist at all, there must be production in order to satisfy the desires of the consuming individuals.