The nominal recovery is now complete
The 3rd quarter NGDP figures were just released, and they show the nominal economy is roughly back on the old trend line, with NGDP rising at a 3.8% annual rate since the fourth quarter of 2019.
The economy still has lots of problems, but they are no longer nominal problems, they are real problems. Or, if you prefer the confusing terminology used by economists, the economy no longer has a “demand” problem; it has “supply” problems.
What a contrast to the Great Recession, which we entered with a trend rate of NGDP growth of roughly 5%, then quickly fell 8% below trend, and then instead of returning to the old trend line we started recovering along an even lower trend line of roughly 4% NGDP growth. Unemployment fell very slowly.
This time, the Fed used its new flexible average inflation targeting (FAIT) approach to aggressively push the economy back to the old trend line. And it worked perfectly! Unemployment fell from 14.8% to 4.8% in only 17 months, something almost no one (other than Lars Christensen) anticipated last year.
My only fear is that we might overshoot. NGDP growth was at an annual rate of 7.8% in the third quarter, which is fine when recovering from a recession. But we wouldn’t want growth to continue at that clip going forward. The Fed needs to bring NGDP growth down to a level of roughly 4%, to insure it can meet its FAIT objectives for the 2020s. The TIPS spreads have me a bit worried.
PS. Would slowing to 4% NGDP growth cause a rise in unemployment? I don’t think so. There’s a massive labor shortage out there, and the areas of the economy that are currently overheating are concentrated in consumer goods, which are often imported. There needs to be some rebalancing toward (job intensive) services, but that can occur with 4% NGDP growth. To be clear, I think NGDP growth will probably overshoot 4%
next this quarter, but the Fed needs to bring it back to roughly that level ASAP. And yes, the actual target is 2% inflation, not 4% NGDP growth. But they won’t achieve that over the 2020s unless NGDP growth is relatively close to 4%. Please don’t turn success into failure!
PPS. Notice that when NGDP recovers quickly we don’t have a financial crisis? That’s not a coincidence. Financial crises occur with deep and prolonged declines in NGDP.
PPPS. The Hypermind NGDP market is now predicting negative NGDP growth in Q4. If you disagree, then I’d encourage you to place your bets.