↕ Is good news on the US economy really bad news? Productivity numbers will decide.

Also: 5 Quick Questions for … policy analyst Neil Chilson on the new push for tech regulation

Quote of the Issue

"Every high civilization decays by forgetting obvious things." - G.K. Chesterton

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Room Temperature Superconductor Update:

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The Essay

↕ Is good news on the US economy really bad news? Productivity numbers will decide.

Journalists have a reputation for focusing on the negative. After all, you never see a “Plane Lands Safely” news headlines. Yet even when I was a full-time news reporter, I always preferred to focus on the positive. In a way, then, this newsletter is a natural fit for my personal preference and natural inclination.

But sometimes good news can be bad news, and I often have to fight my natural bias to see things that way. Take today’s July jobs report. Certainly, it seems like pretty good news all around — news that would seem to point toward a non-recessionary “soft landing” for the US economy.

Perhaps the most noteworthy sign that could be suggesting it’s time to declare “all clear” on the threat of a downturn: Non-farm payroll employment increased by a less-than-expected 187,000 in July after a downwardly revised 185,000 gain the month before, the two weakest monthly gains in two-and-a-half years. The composition of those gains is also encouraging, according to Capital Economics:

July’s gain was heavily dependent on an 87,000 increase in health care & social assistance and a 15,000 increase in government. The cyclical sectors of the economy contributed less than 100,000 additional jobs, pointing to a real economy that, echoing the muted survey-based evidence, is a lot weaker than the pick-up in second-quarter GDP growth suggested.

So what might seem like “bad news” to many Americans — a weakening job market — can be interpreted as good news if you think slower growth is needed to tame inflation. The flip side, however, is that seemingly good news might better be interpreted as bad news.

For example: Wage growth came in at a higher rate than forecast, with a 4.4 percent increase from the year-ago period. That means real wages are growing given a 3 percent inflation rate, as measured by the Consumer Price Index. “Still a sellers’ market for labor,” is how JPMorgan puts it.

Here’s the problem: As The Wall Street Journal explains in its piece on the jobs report, “wage gains exceed both their prepandemic pace and a rate economists believe lines up with low, stable inflation. Fed officials would likely see 3.5% annual wage growth as consistent with inflation near their 2% target, assuming that worker productivity grows modestly.”

That analysis assumes modest productivity growth since the Fed views sustainable wage growth as roughly the inflation rate + the rate of labor productivity growth. And from the fourth quarter of 2019 to the second quarter of this year, it grew at a 1.4 percent annual rate, the same as over the prior five years. So 2-ish percent inflation + 1.4-ish percent productivity growth gets you that 3.5 percent “sustainable” wage growth number.

But, but, but … that 1.4 percent productivity number includes a boffo second-quarter report that came out yesterday. Productivity, or nonfarm business employee output per hour, rose at a 3.7 percent annual rate from April through June, the biggest increase in nearly three years. The median estimate in a Bloomberg survey of economists forecasted a 2.2 percent rise. If that Q2 number signals a productivity acceleration, “wage growth of 4 percent is no longer necessarily a deal-breaker for the Fed,” according to Capital Economics.

The big question, then: Are we seeing the start of a productivity boom, perhaps driven in part by the wider and more capable use of AI/machine learning?