In the span of two days we learned that the inflation rate is below the Federal Reserve’s target rate and that the economy created a surprisingly large 263,000 new jobs in April.
This wasn’t supposed to happen.
Even before President Trump took office, then Fed chair Janet Yellen was warning that the economy was dangerously close to “maximum employment.” Strong job growth going forward, she said in early January, could spark inflation.
In May of that year — almost exactly two years ago today, in fact — the media’s favorite economist, Mark Zandi at Moody’s, declared that: “With the economy at full employment and seeming destined to blow past it, the current expansion is likely entering its later stages. An overheating economy, where tight labor markets result in significant wage and price pressures, has been a necessary condition for all past recessions.”
Oops. The economy created about 5 million new jobs after Zandi made that statement. The expansion gained strength. And inflation is nowhere to be seen.
Friday’s report from the Bureau of Labor Statistics shows that the economy created 263,000 new jobs in April, which was well above economists’ forecasts.
The unemployment rate, which is now 3.6 percent, is the lowest it’s been since Richard Nixon was in his first year as president. Wages are growing, too. They were up 3.2 percent in April, marking the ninth straight month of 3 percent-plus gains. As the White House Council of Economic Advisers notes: “Prior to 2018, nominal average hourly wage gains had not reached 3 percent since April 2009.”
Yet, two days before this latest jobs report came out, the Fed said that “On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.”
Not only has the economy shown no sign of slowing down, growth has been accelerating under Trump, which is remarkable given that he inherited an economy that had been slowing down in President Obama’s last year in office, and that was already long in tooth as far as expansions go — the recovery had started 7 ½ years before Trump took office.
Yet, in the 28 months since Trump took office, the private sector has created almost 5.2 million new jobs. That was slightly less than the number of jobs created in Obama’s last 28 months in office. But job growth in manufacturing, goods-producing and construction industries — the kind of good middle class jobs Obama promised to create in abundance — has been faster under Trump than Obama.
Take a look at GDP growth and you see that year-over-year quarterly GDP growth has been steadily increasing under Trump. (See the nearby chart.)
John Mason, writing in Seeking Alpha, says: “This is remarkable performance, not only because the rate of growth increased, without one quarter of decline, for 12 quarters, but also because this period of expanding economic growth began seven years after the economic recovery began.” This, he says, is not typical behavior at all.
“One could argue,” Mason went on, “that this behavior points to the fact that the supply side of the economy is driving economic growth and not erratic or hit-and-miss demand side economic policies.”
Mason has hit on the reason why mainstream economists are continually dumbfounded by the strength of the economy under Trump, while they were continually too optimistic about growth under Obama. They continue to rely on Keynesian economic models that focus on the demand side of the equation. And while Obama’s economic policies were pure Keynesian, Trump’s tax cuts and deregulation have helped unleash the supply side of the economy.
Given that bias, don’t be surprised if mainstream economists continue to be surprised by “unexpectedly” good economic news under the current president.
Correction: The original version misstated the job growth number during President Obama’s last 28 months in office. It has been corrected.
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