Anyone who thinks they understand what is happening in the economy – and what will happen – should think some more. The post-pandemic state of the economy is somewhat of a mystery, but a mystery worth exploring. Unemployment is a low 3.8%. Inflation is somewhere between 3.5% and 4.5% depending on which index is used. Mortgage rates are about 7.5%, the highest rates since 2001. And the numbers released a few days ago have inflation being at best flat and at worst up a bit, raising questions about another rate increase.
The yield on the 10 year Treasury is about 4.8% and the 30 year Treasury is about 4.9%. The Fed Funds rate is about 5.33% – an inverse curve. And yet the economy produced 336,000 new jobs in September, outperforming predictions by almost two times.
In summary, as interest rates have risen over the past one and a half years, inflation has declined but surprisingly jobs have meaningfully increased. Typically increasing interest rates results in economic stagnation not in economic growth. Rising interest rates resulting in economic growth is counter-intuitive, counter-historical, and counter to conventional economic theory.
So why is this happening? One plausible theory is that essentially there are more jobs than people who need to work, i.e. there is a labor shortage allowing for significant pay raises and therefore strong consumer spending supporting continued economic growth.
ARENT FOX SCHIFF
by DAVID L. DUBROW
OCTOBER 17, 2023