Covid Stimulus Opened Portal to Future And Inverted Job Market

The future is not one of manual labor. With each new generation, mankind skews a little further toward his intellectual capacities, away from the physical. The great invention of capitalism is the stock market, which allows for prosperity by way of investment. Use your mind to pick the right businesses, and your palms stay eternally smooth. Sure, some of those investments rely on the physical toil of a worker down the line, but as machines and AI bear more of the load, on an infinite time horizon, the contribution of human physical labor to the economy approaches zero.

It's not hard to see a future in which people’s livelihoods are determined entirely by their investment ability, because that future is right in front of us. The truly extraordinary thing about COVID, a generally horrible thing, was that it expedited elements of a future that was already clearly on track to happen. It’s easiest to see this through a financial lens: demand soared for products and services that were already changing the way we work, as we realized the capacity to sustain a great deal of our productivity without the physical labor of a commute into an office. So tech sales surged, and who were the great beneficiaries of the COVID economy? The people with the most tech stock.

The great monetary experiment of COVID was also perfectly consistent with our preexisting trajectory – almost suspiciously so. Without much hesitation and early on, policymakers decided the best response to the economic strain likely to come was more easy money and interest rates at zero (a destination most economists believed we were headed to already). Eventually, a few blocks down in Washington, the White House decided to fulfill another common view of the future by introducing a form of Universal Basic Income via the stimmy-checks.

Where did a bunch of that stimmy money go? Buying stocks and crypto.

If our future is of less work and more investment, then periods of economic slowdown will increasingly push people back into a freshly outdated, more labor-oriented version of the workforce. This is probably what we are seeing right now.

For the first time in history, thanks to government support and a huge rally in asset prices during a period of unprecedented trading, incomes rose as the number of people with jobs went down. To reiterate: for the first time ever, total personal income rose alongside unemployment during a recession.

Between stimulus transfers that in many cases exceeded hourly work rates pre-pandemic, and monetary support for markets that rewarded speculators in stocks to crypto with dot-com shattering valuations, COVID created a profound window into a future of a labor-free economy.

That has probably reversed the osmosis between policy and employment such that, for the moment, tighter financial conditions actually lead to job gains instead of losses. If this is true, that employment is strong because of – instead of in spite of – tighter policy, it weaves a compelling thread between the three biggest macroeconomic riddles today.

Here's what I hear people puzzling over the most:

1) How can we have a “recession” if the labor market is so strong?

2) Why is consumer sentiment so sour despite 11 million job openings?

3) Why is good data bad for stocks?

The first one is kinda easy. Not to beat a dead horse, but the “old” definition of recession as slowing GDP is effective because the point of the label is to describe if things are getting better or worse. Static definitions and nominal thresholds don’t work when the economy does not have some steady state – it’s always changing, and generally improving. GDP slowed after the COVID bounce-back as fiscal and monetary support unwound, stocks crashed, and incomes declined from their COVID peak. The financial situation for many deteriorated and now they’re reentering the workforce. There are plenty of decent, paying jobs, so the current situation may not be “bad,” but for many, it’s worse.

Combined with inflation, that pretty much answers the second riddle. The University of Michigan Consumer Sentiment survey is near the lowest reading ever, a powerful indication of just how favorable the COVID economy was for many. People assess their quality of life as a rate of change, and it’s hard to beat record savings and income as well as the financial self-sufficiency that many were able to enjoy when Stocks Only Went Up. Now, there are 11 million jobs to choose from, but they require more hours of labor to match what people had just a year ago.

As I wrote nearly three years ago, America played God in the second quarter of 2020. We didn’t just soften the blow of “recession,” we flipped it on its head. It makes sense then that the relationship between output and employment may be inverted for the moment. The stock market is already inverted, trading negatively when good labor data come out. That’s because the stronger data represent our separation from the COVID Boom Times.

Eventually, the relationship between jobs and the economy should revert back to something more normal; we’ll know when stocks actually respond positively to good data again. Until then, Powell and anyone else that relies too heavily on employment data are likely to be off-target in achieving their goals.?

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