Charles Steindel

State labor markets were again soft in August. Texas, Indiana, Minnesota, and Wisconsin were the four states, while South Dakota saw a .7 percent decline. Numbers of other states had statistically insignificant drops. An interesting sidelight was that the original report that New York government employment had increased by an incredible 40,600 in July was revised to now show a 4,600 drop that month!

Six states, and DC, had statistically significant increases in their unemployment rates in August and one (again Connecticut) showed a decline. South Carolina’s rate increased by .4 percentage point. The highest unemployment rates were in DC (5.7%), Nevada (5.5%), California (5.3%), and Illinois (5.3%). No other state had rates as much as a point higher than the national 4.2%. Alabama, Hawaii, Iowa, Maine, Maryland, Mississippi, Nebraska, New Hampshire, North Dakota, South Dakota, Vermont, Virginia, and Wisconsin had rates of 3.0% or lower, with South Dakota at 2.0%.

Puerto Rico’s unemployment rate was again unchanged at 5.8%, while the island’s job count grew by 3,100.

State Labor Markets in August 2024

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Sharmila Whelan

India’s economy is rebounding, with the business cycle upswing becoming more pronounced and widespread. Although GDP growth slowed slightly in the second quarter, moderating to 1.1% quarter-on-quarter (QoQ) from 1.3% QoQ, this was largely due to a contraction in government spending, inventories, and exports. Importantly, both consumption and investment spending grew robustly, marking the fastest pace since late 2021 and early 2022, respectively. Leading indicators remain positive, and the economic fundamentals are supportive of continued growth.

The corporate profit cycle is in full swing, with company balance sheets in rude health, positioning businesses to increase investment. Corporate debt-to-equity ratios have declined significantly, and corporate debt as a percentage of GDP is well below global averages. Consequently, the debt service-to-equity ratio is now below the 2007-2023 average, and the interest coverage ratio remains stable—44x for IT, 7.5x for manufacturing, and 1.7x for non-IT services. Infrastructure companies, buoyed by optimism, are increasing their spending, according to the RBI’s Q1 FY24/25 Services and Infrastructure Outlook Survey. Capacity utilisation is tight, and order backlogs are rising. Additionally, monthly data shows upward trends in the capital goods sector and the eight-core industry infrastructure index.

Public sector banks, which dominate the financial sector, have never been stronger. Non-performing loans (NPLs) are at a 12-year low due to a sustained reduction in new NPLs and higher write-offs. Provisioning levels are at their highest since 2007, and asset quality among large borrowers continues to improve. The sector is well-capitalised, with average capital adequacy ratios of 16.8%, comfortably above the RBI’s 11% regulatory minimum. Private credit is growing at double-digit rates, with strong borrowing demand across industries, services, small and medium enterprises, large corporations, mortgages, and big-ticket consumer goods.

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Source: Westbourne Research and Haver Analytics

High-frequency consumption data, including three-wheeler and passenger vehicle sales, consumer goods output, and retail sales, moderated in July and August. However, this softening is likely temporary, given the rising household credit demand—a leading indicator of consumption. As inflation slows (down to 3.7% YoY in August from a peak of 7.4% in July 2023), household purchasing power is also improving.

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India’s growth trajectory extends beyond a typical business cycle recovery; it represents a multi-year growth story. A decade of steady structural reforms has transformed the business landscape. India’s World Bank Ease of Doing Business score has improved significantly, now at 71.1, well above the East Asia & Pacific average of 63.3.

Key reforms such as the 2016 Insolvency and Bankruptcy Code and the RBI’s 2018 Resolution of Stressed Assets Framework have been critical in restructuring the corporate sector and tightening bank regulations. The implementation of GST in 2017 and the corporate tax cut from 30% to 22% in 2019 have unified tax rates across states, enabling businesses to scale, enter new markets, and compete globally. Furthermore, the passage of four labour codes in 2019-2020 addressed key hurdles to growth and foreign investment. The 2020 Production Linked Incentive (PLI) scheme also opened doors for investment in key industries such as advanced manufacturing, electric vehicles, renewables, and high-tech sectors. The government’s budget is focused on infrastructure investment, with substantial spending on roads, ports, airports, and railways, as evidenced by the growing share of capital expenditure in total federal spending.

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Despite concerns about political uncertainty following this year’s general elections and the potential for fiscal slippage, these fears are overstated. India’s pro-growth agenda is deeply rooted, and governance is shifting from central control to competitive federalism and capitalism. The role of the government has evolved from being a growth driver to a growth enabler, creating economic incentives to attract private investment. With reduced fiscal transfers from the center, state governments are now motivated to generate growth and create jobs by attracting investment, especially given the expanding working-age population.

India

India’s Economic Rebound and Growth Prospects

Paul L. Kasriel

Living in a “swing” state, I am bombarded with political television ads. The GOP ads blame the 2021-2022 surge in inflation on Bidenomics and, by association, Harrisomics. A number of the elements of Bidenomics increased the federal budget deficit. But I will argue that federal budgetary deficits do not cause higher inflation. Rather, the actions of the Federal Reserve and the depository institution system cause higher sustained inflation rates by their combined ability to create credit figuratively out of thin air. The Federal Reserve and the depository institution system are, in effect, legal counterfeiters, i.e., they have the unique ability to create credit, figuratively, out of thin air. (Thin-air credit here will be defined as the sum of the Federal Reserve liability items, reserve deposits and vault cash of the depository institution system, currency held by the non-depository institution system, and the sum of depository institution system items, debt securities and loans. (An equivalent definition of thin-air credit is the monetary base, created by the Federal Reserve plus credit created by the depository institution system.) When credit is created out of thin air, the recipients of this credit are able to increase their spending without necessitating any other entity to reduce its spending. With some exceptions, when an entity other than the Fed/depository institution system lends to another, the lender reduces its current spending, transferring spending power to the borrower. This is called saving on the part of the lender.

Let us look at some data relating net federal borrowing as a percent of nominal GDP versus thin-air credit growth to goods/services price inflation. The inflation measure I will use in this analysis is the chain-price index for Gross Domestic Purchases. This inflation measure includes the prices of personal consumption expenditures, business expenditures, residential real estate services expenditures and government expenditures on goods/services. It excludes the prices of US goods/services exports. I have tested lead-lag relationships between net federal borrowing and inflation and thin-air credit growth and inflation. For both variables, the highest correlation coefficients occur when both net federal borrowing and thin-air credit growth lead inflation by two years. So, this year’s inflation rate is most highly correlated with net federal borrowing and/or thin-air credit growth two years prior.

If federal government net borrowing influences inflation, we would expect a negative correlation between the two series. And that is what we observe in Chart 1. The correlation coefficient between the two series is negative 0.14. Although the correlation coefficient has the correct sign, the absolute value of its magnitude, 0.14, is low, suggesting that there is not much association between the two series.

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If thin-air credit growth influences inflation, we would expect a positive correlation between the two series. And that is what we observe in Chart 2. The correlation coefficient between the two series is positive 0.61. The magnitude of the absolute value of the correlation coefficient is 0.61, which suggests a relatively high association between the two series.

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A multivariate linear regression allows us to measure the effect on inflation given net federal borrowing and given thin-air credit growth. I ran such a regression with both net federal borrowing and thin-air credit growth lagged two years. Both coefficients on the independent variables had the “correct” signs. The coefficient on federal net borrowing as a percent of nominal GDP was -0.06; the coefficient on thin-air credit was +0.44. So, the effect of thin-air credit on inflation was much higher than that of net federal borrowing. In addition, the t-value on the thin-air credit coefficient is +6.07, which implies there is high probability that the thin-air credit growth coefficient is associated with inflation. In contrast, the t-value on the federal net borrowing coefficient is -0.72, which implies that there is a very low probability that federal net borrowing is associated with inflation.

If inflation is the result of “too much money chasing too few goods”, then that is exactly what we saw in 2020, as shown in Chart 3. Because of Covid, real GDP contracted by 2.2%, i.e., too few goods and services. At the same time, thin-air credit increased 15.7%, i.e., too much “money”. The big surprise would have been if inflation subsequently had not spiked!

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There’s an old University of Chicago School of Economics thought experiment. What would happen if the government dropped money from a helicopter? Well, in 2020 and 2021, with the help of the Federal Reserve and the depository institution system, the federal government figuratively did drop money from a helicopter. In 2020-21, in response to Covid, the federal government mightily increased its transfer of funds to households and businesses. In 2020, unemployment insurance accounted for a lot of these transfers. In 2021, the American Rescue Plan legislation transferred funds to households above and beyond unemployment insurance. This resulted in sharp increases in net borrowing by the federal government. As shown in Chart 4, increases in thin-air credit nearly matched the increases in net federal borrowing. The increase in net federal government borrowing did not cause the increase in thin-air credit. The Federal Reserve did not have to allow the massive increase in thin-air credit. It chose to because it tends to believe that weakness in aggregate domestic spending arises because of some demand deficiency rather than a negative supply shock. The Fed followed the same playbook after the negative supply shock of the oil embargo in 1973. Chart 5 answers the question of what happens after the government drops “money” from a helicopter. With a lag, the private domestic sector increases its nominal expenditures and higher inflation occurs.

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If the Fed and the depository institution system had not created the massive amounts of thin-air credit, which financed nearly all of federal government net borrowing in 2020-21, the public, including foreign entities would have had to finance the government borrowing. This would have resulted in higher interest rates in order to induce more private-sector saving. Some recipients of federal government largesse would have increased their spending whilst others reduced their spending, i.e., increased their saving. Nominal GDP and inflation would not have increased to the degree that they did with the thin-air credit financing of the net federal government borrowing.

There might be legitimate reasons to criticize Bidenomics. But higher inflation is not one of them. Powellomics was responsible for the surge in inflation in 2021 and 2022. Federal Reserve Chairman Powell and his coterie are responsible for setting the inflation fires of 2021 and 2022. Starting in 2022, the Fed began taking actions to extinguish the inflationary fires that it had started earlier. The Federal Reserve is not malicious. Rather, it is incompetent. In the face of a negative supply shock in 1973 caused by the oil embargo, the Fed aided and abetted the inflation that followed. The Fed provided the gas to inflate the housing bubble in the mid 2000s. Asset prices are not captured in goods/services price indices. But asset prices, too, can rise because of excessive growth in thin-air credit. And, as I have argued here, the Fed set the inflationary fires that flared following the negative supply shock of Covid. Not only does the Fed’s incompetence have economic consequences, it has political consequences, such as blaming Bidenomics for the 2021-22 surge in inflation. The Fed operates in the shadows of general public understanding with no effective accountability. The Fed was established by law in 1913 and is supposed to be accountable to Congress. But Congress uses hearings of Fed officials as soapboxes from which to air political criticisms for their constituents back home rather than holding the Fed accountable for its policy errors.

With seemingly random economic shocks, changing economic relationships over time and changing lag structures, it would be a Herculean task for the Fed to anticipate all of these uncertainties and act accordingly. But it would be possible for the Fed to not amplify the effects of these difficult to anticipate shocks. If the Fed were to act so as to produce a steady rate of growth in thin-air credit, business cycles and inflation flare-ups still would occur. But the amplitudes of these would be reduced. What might the rate of growth in thin-air credit be? From 1955 through 2023, the median year-over-year growth of real GDP has been 3.0%. Going forward, growth in the labor supply is expected to slow, which, all else the same, would lower growth in real potential GDP. But with new technologies, including AI, coming on stream, labor productivity could be expected to increase, which would be a plus for real GDP growth. So, why not have the Fed produce a growth rate in thin-air credit of five percent, three percent real GNP growth and two percent for inflation?

Powellomics, not Bidenomics, Caused the 2021-22 Surge in Inflation

State real GDP growth rates in 2024:2 ranged from Alaska’s -1.1% to Idaho’s 5.9%. There was an odd distribution of agricultural output growth, with pronounced gains in Vermont, Wisconsin, Kansas, Nebraska, New Mexico, and Wyoming, but sharp losses in North Dakota, Arkansas, and Mississippi. Elsewhere, New York’s numbers were swelled substantially by a surge in finance. The industrial Midwest benefitted by increases in durable goods output. As expected, Pennsylvania has become the sixth state with an annual rate of nominal GDP above $1 trillion (with the annual revisions, the Keystone state went above that mark in the first quarter). California’s GDP is now estimated to be higher than $4 trillion, at an annual rate. The five currently above that threshold are California, Texas, New York, Florida, and Illinois; Ohio is the only other state with nominal GDP above $900 billion; New Jersey, Georgia, North Carolina and Washington are above the $800 billion mark.

Idaho also led in personal income growth, with an 8.3% rate of increase. North Dakota was last at 2.1%. The above-noted distribution of agricultural output growth also appeared in the income numbers, with the indicated high farm output growth states seeing important growth in farm income, and the others unusually large declines in income from that sector. Transfer income growth was, as usual, dispersed, but probably less so than has usually been the cast; a drop in Massachusetts, virtually no change in Texas, and double-digit growth rates in Iowa, South Dakota, and California being of some note.

State GDP and Personal Income in Q2 2024

The Federal Reserve Bank of Philadelphia’s state coincident indexes in August were again soft. Connecticut continued to be on top, but its relatively modest .6 percent increase was the only state’s above .5 percent. 24 states saw declines, with Massachusetts and South Carolina down by more than .5 percent. Over the 3 months ending in July, 15 states were down, with Massachusetts dropping 2.1 percent, while South Carolina and Michigan were also down more than 1 percent. Repeating the odd New England pattern, Connecticut was on top with an increase of 2.4 percent, while Alabama and Oregon rose more than 1 percent. Over the last 12 months, 5 states were down, and another 8 saw increases of less than 1 percent. Rhode Island’s index was down 1.6 percent. Arizona had a 4.8 percent increase, and Texas, Idaho, Utah and Connecticut had gains of more than 3 percent (and Nevada was up 2.99 percent).

The independently estimated national estimate of growth over the last 3 months (.6 percent) and 12 months result (2.7 percent) both appear to be roughly in line with the state numbers.

State Labor Markets in August 2024

Charles Steindel

More Viewpoints

India’s Economic Rebound and Growth Prospects

Powellomics, not Bidenomics, Caused the 2021-22 Surge in Inflation

State GDP and Personal Income in Q2 2024

State Coincident Indexes in August 2024