The Scene
All eyes — on Wall Street, in Washington, and around the world — are on a single number this week: tomorrow’s US government report on how many jobs the economy added in August. It’s the last piece of major economic data the Federal Reserve will get before it decides whether, and how deeply, to cut interest rates at its meeting later this month.
The last time people were this focused on labor numbers, outside perhaps of the spring of 2020, was exactly nine years ago, and the vibes were heading in the other direction.
In 2015, the economy had recovered from the financial crisis but the question was whether it was strong enough for the Federal Reserve to raise interest rates, for the first time since 2006. There were concerns about a slowdown in China’s economic growth and the stock market had “flash crashed” just a few weeks earlier (sound familiar?) and that August’s jobs report was the last crucial data point for the Fed to consider. It ended up being weaker than expected, and the Fed held off on raising rates.
Ahead of Friday’s report, we caught up with Jason Furman, who spent eight years as a top economic adviser to Barack Obama and now teaches at Harvard’s Kennedy School.
The View From Jason Furman
Are you surprised how quickly the inflation fears receded and the jobs fears spiked?
Jason Furman: It actually is normal in that, most times in the past, inflationary episodes have been broken by recessions. You get a bit too much inflation, the Fed overreacts, you get a recession, the inflation goes away. We’re seeing a milder and more pleasant version of that whipsaw, where this is definitely not a recession right now and inflation has already come down. It’s not waiting for a weakening of the economy.
We’ve had a lot of data points in the past few weeks, some of them contradictory. How do you weigh them?
It’s a weird economic situation right now, because GDP and consumers and business investment are all booming, just fantastic, 3% growth. But you have the forward-looking signals about manufacturing and concerns about consumer balance sheets, things like delinquencies, going the other direction. The hard data is mostly very strong, and a lot of the soft data reflects expectations about the future being weak. So it’s this sense of foreboding.
Isn’t the forward-looking stuff more meaningful? Like the turkey-in-the-oven problem?
I’m nervous about it, but I believe what businesses and people do with their dollars more than what they do with their words. And businesses are continuing to invest. Manufacturers are continuing to build structures. Consumers are still buying both goods and services. So when people have a choice to make, they are acting in a confident way.
But companies are spending shareholders’ money with stocks at all-time highs. And history has shown that consumers don’t always know what’s good for them.
That’s possible. But there’s a limit to how much people can borrow and how far they can get out over their skis. And people know, for example, that their real wages are growing now in a way that they weren’t a year or two ago. That is a good reason to [be spending money]. We’re switching from job growth supporting the economy to real wage growth supporting the economy. That’s a sustainable thing. But you want to look ahead, and the Fed’s right to be more nervous.
Why does it seem like the revisions to the jobs numbers are always down, not up?
One possibility is that the revisions are wrong. That’s what Goldman Sachs is saying, that tax data doesn’t capture all immigrants. But historically, when you have an economy that is slowing, you get a lot of serial negative revisions and when it’s speeding up you get a lot of serial positive revisions. And there’s no question that the labor market is slowing. I remember talking to President Obama in 2015 or so, and we’d had, I think, 24 straight months of positive revisions, and he asked ‘Why can’t we have the great number the day we announce it? Why do we wait two months when nobody is paying attention?’
What do you think about the idea of taxing unrealized capital gains?
The tax nerd in me likes it. There are practical implementation issues, but there are also a lot of issues like tax avoidance and distortion that are caused by tying capital gains to realization. But boy, do people hate the idea, and I think it is way less central to [Kamala Harris’] campaign and economic plans than it is to the magnitude of discussion. [Harris rolled back Biden’s plan yesterday but appears to still be supporting a minimum tax on billionaires that would include unrealized capital gains.]
On the other end of the labor market, what about untaxing tips?
I don’t know any economist who thinks that’s a good idea. One, it treats different types of income differently. Two, a lot of low- and middle-income workers aren’t paying taxes, so it’s not going to do anything for them. And three, in the long run it will encourage more tipping, which I don’t think anyone wants.
Let’s assume things move forward as expected and we get a soft landing. Powell’s legacy will start to cement – do you think he’s been more lucky or good?
Legacy is TBD, but I think an awful lot of good over luck. First of all, he moved more quickly than almost any of his critics in raising rates in 2022. And in 2023 he articulated a view [during the regional banking crisis] that if anything gets broken in the financial system because of that, we’ll use other tools, not interest rates, to deal with them, which has been completely vindicated.
A bunch of inflation has come down because of luck — the supply chain was always going to unsnarl — but if you didn’t have the higher rates, that luck would have been offset by a new source of inflation, which was sustained higher demand. So you need to lock that luck in with monetary policy, which he did well.