What this covers
A big jump in jobless claims actually muddies the picture for the labor market. Meanwhile, consumer prices that many in the mainstream are claiming as sticky...are. But not for the reasons stated. We're seeing "sticky" prices in the technical sense, and that's not good.
Eurodollar University's conversation w/Steve Van Metre
Bloomberg Odd Lots Austan Goolsbee Explains the Fed’s Big Rate Cut https://www.bloomberg.com/news/articles/2024-10-11/austan-goolsbee-explains-the-fed-s-big-rate-cut
Atlanta Fed Sticky Price CPI https://www.atlantafed.org/research/inflationproject/stickyprice/
https://www.eurodollar.university Twitter: https://twitter.com/JeffSnider_EDU
Source description (no synthesized summary yet).
The labor market is deteriorating faster than official data suggests, and disinflation driven by falling demand—not rising supply—signals economic weakness ahead despite misleading positive headlines about job creation and inflation cooling.
- Jobless claims are rising across multiple sectors independent of hurricanes, with manufacturing layoffs finally visible in data after months of announcements
- Sticky vs. flexible price dynamics show underlying disinflation is demand-driven, not supply-driven, which historically precedes recessions
- Official payroll reports contain significant measurement errors that obscure true labor market weakness, creating false confidence ahead of what resembles 2007 conditions
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Small business owners do not automatically raise prices year-over-year by the same percentage they raised them the previous year, nor do they raise prices merely because the CPI increased; this common assumption about business pricing behavior is incorrect.
“when you talk to people about sticky inflation what they perceive this to be is some business owner every year or every six months or whatever the interval is automatically raises their price now I've worked for a number of small businesses over my life and I can tell you that never actually happens there's not one day that hey well you know this time last year we raised prices by you know 5% so we're doing it again or the CPI went up so we're raising prices”
Even when demand conditions change and new models arrive that don't sell as expected, retailers will not immediately cut prices on new inventory, but instead hold prices and hope to sell, only beginning to discount after months of poor sales, creating a six-month delay between demand shift and price adjustment.
“if the new models come in and demand isn't there for them dealers are not going to cut prices right away even though demand conditions have changed those prices will be sticky not because of underlying inflation mechanics or anything of the like it's just that that's how World Works dealers are going to try to get the best price that they can for as long as they can and only after a period of time will they say uhoh we didn't sell those new models like we thought maybe now we'll start discounting by then you're six months down the road”
Retailers do not immediately discount inventory of goods they have in stock when demand falls; instead, they attempt to sell existing stock at full price as long as possible, and only when new models arrive do they begin discounting older inventory to make room, creating periodic repricing rather than continuous pricing adjustment.
“so say we're selling sofas and we've got you know 10 sofas and we can't sell them but what happens at some point we're going to discount them because the new ones are going to come in and that's where you see this periodic repricing is when the new model shows up and a lot of people more familiar with automobiles right you go in and buy a car and they say hey we got a deal on last year's model because the new ones are coming off the truck and we want to get rid of these so we'll give you a deal to take one of those you see the same thing the new models typically come in at a higher price point it's very rare very unusual that a new model will be like hey that one's 5,000 cheaper than the old one doesn't really work that way and if the new models come in and demand isn't there for them dealers are not going to cut prices right away even though demand conditions have changed those prices will be sticky not because of underlying inflation mechanics or anything of the like it's just that that's how World Works dealers are going to try to get the best price that they can for as long as they can and only after a period of time will they say uhoh we didn't sell those new models like we thought maybe now we'll start discounting”
Even if most jobless claims increases are weather-related, when the underlying economy is already weak with deteriorating conditions, adding hurricane impacts on top of existing negative factors ('black marks') against the economy represents a cumulative negative signal that should not be dismissed.
“I might be inclined to agree with that to an extent if we were say in the middle of 2005 with Hurricane Katrina where the economy was generally just fine or any number of storms that happened in the 1990s when the economy was legitimately booming it has the the margin of error the ability to absorb something like that and just continue to chug along where jobless claims could go up because of the storm and it would just okay we'll absorb the we'll take the hit and we'll just move on uh all along our way we are not in any type of similar shape here so even if it's even if most of this rise in jobless claims is due to the weather in this type of situation that adds one more black mark in an economy that has a lot of black marks already against it”
Unemployment has variable long lags before manifesting in claims data; manufacturers have been announcing planned layoffs for months, but these layoffs are only now appearing in jobless claims and other employment measures like JOLTS hires and household survey figures, which is consistent with expected lag behavior.
“manufacturers in particular have been saying for many months now yeah we're getting to the end here we need to start laying off workers and we haven't seen it show up in things like unemployment claims we have seen it in other places we've certainly seen it in the lack of hiring uh The jolts Hires number the the household survey figures the hours work numbers which all look pretty Grim already so we have seen employers take these steps we still haven't seen the evidence of the the sustained and large scale job cuts and here we get the first week of maybe that taking place”
History shows that once an economy enters a slowdown phase, it does not magically stop at an ideal 'Goldilocks' state of moderate growth and full employment; rather, slowdowns tend to accelerate once initiated, eventually shifting into contraction.
“history shows once you get into that slowdown it doesn't just magically stop at the Goldilocks level it gets to a point where it slows down and slows down and then just takes off on the on the wrong direction”
The Atlanta Fed provides academic research-based categorization of consumer prices into 'sticky' and 'flexible' categories, where sticky prices are those that do not reprice frequently (such as household furniture, which reprices on average only every six months), while flexible prices reprice nearly immediately to current conditions.
“the Atlanta fed actually provides a breakdown between what they consider sticky consumer prices and those that are flexible this goes there's a lot of academic research behind this and it goes all the way back to John meor keing and the original idea behind sticky consumer prices and what sticky actually means in this technical sense is that Goods don't repic all the time they don't respond to conditions every day and what you find is a lot of surprising results for example household furniture that doesn't repr price every month for example on average according to the research it's about every six months”
Because sticky goods don't reprice daily but only periodically (e.g., every six months for furniture), their prices reflect economic conditions from months in the past; when goods from six months ago are repriced today, they incorporate conditions from that previous period, not current conditions.
“if if Goods don't reprice based on conditions today that means that some prices are based on where things were six months ago eight months ago even a year or more and so by segregating prices between technically sticky and flexible which are those items that get repriced more immediately what you see is what we everything we're talking about flexible prices that respond immedi to changes in conditions those have been negative for the last couple years and they're actually getting more negative again during the summertime the stickier prices or those items that don't repic all that often are now slowly starting to reflect the disinflationary conditions”
Job losses have different consequences for the economy regardless of their cause; when workers lose income due to unemployment (whether from hurricanes, storms, or layoffs), their spending power drops, and as more workers remain unemployed longer, this reduced spending eventually feeds back into the broader economy as a negative multiplier.
“there are real jobs they are actually lost and it doesn't matter where it's an auto worker or a restaurant server it all matters because even though there's this idea because of a storm that someone was displaced for a while that the job will come back very quickly now you and I both of in Florida we very close to the storm we know that some of these jobs aren't coming back because the business is not physically there anymore so that's a challenge but the real issue here is it doesn't matter who loses their job or why because their spending power is going to drop and maybe it's transitory maybe a bunch of these workers will quickly go find jobs somewhere else I kind of doubt that will be the case but the real issue I'm looking at is the longer people are on unemployment the longer they have less money to spend in the economy and maybe at first we don't see an initial impact but the longer people are unemployment and get stuck there yes it does slowly back feed into the economy”
Fed officials and policymakers understand that they must 'air on the side of caution' with rate cuts because history demonstrates that slowdowns do not stabilize at optimal points, and if they wait for clear deterioration, they will have waited too long due to long and variable lags in monetary policy transmission.
“what he was saying really Steve is that we need to air on the side of caution that's because history shows that it doesn't just slow down into the way you want it to the unemployment doesn't just rise to 4% or 4.2% or whatever the number happens to be and just stick right there and Plateau at right where we wanted to so what they're saying is the reason we cut rates and the reason we're going to cut rates is because we know we have to air on the side of caution”
A strong payroll report can appear immediately before economic wheels fall off, and the Fed is aware of this historical pattern, which is why they are simultaneously concerned about the very strength that markets are celebrating.
“the payroll can be hot it can look good just before the wheels fall off and oh by the way we are actually concerned in a big way that the wheels could fall off”
Incomes are not keeping up with inflation, which means demand is going down as a result of consumers losing purchasing power, and this represents the opposite of what is desired in an economy (rising incomes with stable or falling prices).
“coming back to Consumer prices yeah everyone's saying now they're not going down fast enough but the reality is they don't go down in a straight line unless something just devastating blows apart such as a pandemic or a financial crisis so this is not to be expected but again it comes back to the issue here incomes aren't keeping up with inflation so demand is going down this isn't what anybody wants now ask any consumer hey price growth is slowing down they yeah Hallelujah but you ask them about their prospects for w increase or hours work they'll say oh not good and that's the problem here what we want is to see exact opposite of what's happening now”
Input prices show more rapid repricing (flexible behavior) compared to consumer-facing prices, meaning cost pressures appear in production costs before they translate to retail prices, and when input prices fall, this eventually transmits through to consumer prices but with a lag.
“as you mentioned this is a demand issue so what you see in the sticky side is input prices are coming down that's that more rapid repricing of of course input prices that shows up in the CPI”
Price growth is slowing down (which consumers celebrate), but consumers are simultaneously pessimistic about their own wage and hours-worked prospects, revealing that the falling prices they celebrate are caused by demand weakness, not supply strength.
“what we want is to see exact opposite of what's happening now as I mentioned in the introduction we talk about sticky consumer prices in the technical sense sticky means something different and it actually does help help you understand what Steve was just saying there is a variable variable speed more than one to how consumer prices react to underlying economic conditions again the use of the word are sticky in the mainstream sense is that economic conditions are being sticky when that's not actually what we're seeing happen uh the Atlanta fed actually provides a breakdown between what they consider sticky consumer prices and those that are flexible this goes there's a lot of academic research behind this and it goes all the way back to John meor keing and the original idea behind sticky consumer prices and what sticky actually means in this technical sense is that Goods don't repic all the time they don't respond to conditions every day and what you find is a lot of surprising results for example household furniture that doesn't repr price every month for example on average according to the research it's about every six months so if if Goods don't reprice based on conditions today that means that some prices are based on where things were six months ago eight months ago even a year or more and so by segregating prices between technically sticky and flexible which are those items that get repriced more immediately what you see is what we everything we're talking about flexible prices that respond immedi to changes in conditions those have been negative for the last couple years and they're actually getting more negative again during the summertime the stickier prices or those items that don't repic all that often are now slowly starting to reflect the disinflationary conditions the sticky price index is slowing down pretty substantially and in a straight line and is continuing to slow down this year”
The rising trend of continued jobless claims typically precedes a spike in initial claims, which represents the eventual impact of prolonged unemployment on the broader economy.
“when we see Rising trends of continued claims typically at some point which we haven't really seen much yet that you see a big jump in initial claims and it all comes back to the fact that spending power has been decreased”
Some jobs destroyed by recent hurricanes will not return because the physical businesses where workers were employed no longer exist, making these losses structurally permanent rather than temporary as is often assumed.
“you and I both of in Florida we very close to the storm we know that some of these jobs aren't coming back because the business is not physically there anymore”
Initial jobless claims reached their highest level in over a year in the first week of October, with increases driven not only by hurricane Helen but also by actual layoffs from companies like Stellantis in Michigan and unexpected claims from California far from hurricane impact zones.
“it's a large jump in initial and continued jobless claims in the first week of October in fact initial claims got up to their highest in over a year now there was obviously some noise in those claims because of the effects of hurricane Helen but even so what that means is that there's a lot of jobless claims out there and a lot of them were due to factors that had nothing to do with the weather there was a jump in claims from Michigan for example tied to layoffs from stellantis there was also another jump in claims from Cali far away from any effects of hurricanes”
Companies like Amazon are requiring all remote workers to return to office full-time, and are deliberately hoping that some workers will quit rather than comply, which amounts to disguised layoffs that allow companies to reduce headcount without formally firing people.
“then you hear companies like Amazon saying we're going to pull everyone back to work boy saying no we don't want to if you don't think Amazon's hoping some of these people are going to quit over that move I guarantee you they're H going to do that they're hoping that happens”
Flexible prices (those repricing immediately) have been negative (declining) for the last couple years and are becoming more negative during the summertime, while sticky prices are only now slowly starting to reflect the underlying disinflationary conditions that flexible prices incorporated earlier.
“flexible prices that respond immedi to changes in conditions those have been negative for the last couple years and they're actually getting more negative again during the summertime the stickier prices or those items that don't repic all that often are now slowly starting to reflect the disinflationary conditions the sticky price index is slowing down pretty substantially and in a straight line and is continuing to slow down this year”
Other employers are observing companies like Amazon employing attrition strategies and planning to adopt similar tactics to reduce workforce without formal layoffs, because they want to reduce headcount while avoiding being seen as 'the bad guy' who fires people.
“and other employers are watching say hey if that works we're going to do the same thing because we want to get rid of people but we don't want to be the bad guy and go out and fire them”
Goolsbee stated that he would not alter his economic view based on a single month of strong data, implying that he is deeply skeptical that the positive payroll report represents a sustained improvement rather than noise or a temporary positive blip.
“if we got multiple months showing big positives like we just saw on the P jobs number I would alter my view but I think people can take that too far from one month”
Even Federal Reserve officials are skeptical of the positive interpretation being placed on recent strong payroll data; they are concerned that the labor market is slowing into unsustainable territory rather than achieving a stable 'Goldilocks' state.
“it's not just us by the way fed officials too they have come out the few that have spoken so far in the wake of the payroll report and said yeah it's great that I mean it's better than the alternative sure but we're not buying this either”
Chicago Federal Reserve President Austin Goolsbee characterized the current economic state as having cooled from 'overly hot' to something like 'sustainable full employment,' and stated that if the economy could be frozen at this exact point, it would represent a desirable outcome, but he knows (and the speakers agree) that such freezing is not possible.
“this was Austin gouby who is the the president of the Chicago fed actually sounding reasonable for once he said we've got to take the broad view so far I think the Broadview shows that inflation has come way down the job market has cooled from overly hot to something like sustainable full employment where we would like it to be and here's the point if we could freeze it right here that'd be a lovely picture and so the question is can you freeze it right there or is it going to get worse”
The September payroll report included substantial measurement error, with only about 60% of the final data available at the time of reporting, meaning the reported figure will likely be revised substantially downward when complete data arrives.
“they know that the actual reporting of the data was somewhere I think around 60% so the rest of the data is to come”
New product models typically arrive at higher price points than the previous generation, and it is extremely rare for new models to arrive at lower prices than the older generation they are replacing.
“the new models typically come in at a higher price point it's very rare very unusual that a new model will be like hey that one's 5,000 cheaper than the old one doesn't really work that way”
If rate hikes work with long and variable lags (as Fed policy theory states), and unemployment itself manifests with long and variable lags, then the fact that unemployment is now rising across all measures means the Fed should have begun cutting rates last summer and fall, not in the current fall, suggesting they are acting too late.
“but then that raises a whole bunch of other questions starting with the one that we always talk about what happened into the long and variable lags because if rate hikes work with long and variable lags and if unemployment works with long and variable lags and unemployment is starting to show itself across the board then the FED is way too late they should have been cutting rates last summer and last fall not this summer and this fall”
The Fed's recent 50 basis point rate cuts reflect awareness that the current slowdown may not stop at the Goldilocks point but could continue deteriorating, and are therefore being cut as insurance even though Fed officials publicly downplay their expectation of an ideal soft landing.
“what ghouls be is saying is that our 50 basis point rate Cuts yes we're out there downplaying it right now the econom is just fine because the economy looks just fine from a certain perspective right now as it is slowing down through that goldilock zone and even the FED is worried because they know it doesn't just stick there they don't just stick the soft Landing because that never happens”
Businesses make decisions based on potentially inaccurate labor market data (due to payroll reporting errors), the Fed bases policy decisions on this same inaccurate data, and investors make investment decisions based on these distorted signals, creating a systemic misallocation of resources and bad economic outcomes.
“you have bad data that makes bad decisions so businesses are making bad decisions the FED assuming that we know that monetary policy did anything but nevertheless bad decisions and then investors make bad decisions that's the issue you and I we're not rooting for the economy to go down by any stretch of imagination we just want a more accurate picture of where the labor market is because I think we suspect it's a little worse than what the data is suggesting”
The Fed's approach to policy is fundamentally reactive—they only have monetary policy tools (the hammer), so they treat all problems as monetary nails, and they are cutting rates hoping it works while understanding they may be powerless to affect the outcome that matters.
“so what basically saying is like look we're cutting rates because that's what we do we all we have is a hammer so everything looks like a nail and we're just going to hope it all works out for the best”
Current economic conditions resemble 2007 in that a strong-looking payroll report preceded deterioration, and the Fed is concerned about repeating that pattern where the economy appeared solid before collapsing.
“you've done a lot of research on the similarities between now and 2007 and I have a reasonable bet here that gouby and the other fed officials are worried about the same thing because they always talk about the trend and then you get this oneoff report they know that the actual reporting of the data was somewhere I think around 60% so the rest of the data is to come we know the reports have been inaccurate to begin with and yet all this excitement yes look we got the soft landing and gouls be say yeah no maybe you don't get too excited here because we've seen this before and that's the risk is we might have seen this before which had then set up of course two quarter basis point Cuts one in November one in December and if we do look like 2007 well then you and I know it's coming right after that which is a lot of big negatives in a payroll report”
Jobs being lost are being reported across the country broadly, which suggests systematic weakness rather than localized disruption.
“jobs are slowly being being lost and then you hear companies like Amazon saying we're going to pull everyone back to work”
The Federal Reserve wants to continue cutting rates beyond current levels to establish a narrative that they 'tried everything' so that when negative economic outcomes occur, they can claim 'we did our job and it wasn't our fault,' thereby protecting their institutional credibility.
“one thing I do want to comment is why the FED still wants to do more raid Cuts is because they know they can't stop anything that's happening but they need an excuse they need to say look we tried it's not our fault the hurricane or some other event happened we couldn't see it coming but we did our job and that is of course the Mystique of the Federal Reserve here”
Disinflation is not good news when it is caused by falling demand rather than rising supply; good disinflation would reflect abundant supply pushing prices down while incomes remain strong, whereas bad disinflation (what is currently occurring) reflects weak demand reducing prices while incomes decline.
“one reason why let's talk about consumer prices Steve disinflation is not good news I keep saying that over and over again it sounds like it's good news like it should be good news and from an individual perspective from an individual consumer perspective it is absolutely good news but the reason why consumer prices are falling off and the way in which they're falling is not good news yeah that's absolutely right Jeff because you want to see it because Supply is going up not because demand's going down and that's a real issue here”
Technically sticky prices are only now starting to reflect the underlying disinflation that broader markets have already experienced, but this reflection is masked because people don't understand the different speeds at which different price categories adjust to economic conditions.
“what they mean by sticky is that inflation pressures are sticking around and being stuck longer than they should be when what's really happening is that technically sticky prices are only now starting to reflect the underlying disinflation that people can't see because they don't understand the differences in speeds that go along with any big Consumer Price bucket”
The September CPI report was characterized by mainstream media and economists as 'sticky and hot,' but this characterization was inaccurate; the report showed something entirely different when examined properly.
“everybody's talking about sticky consumer prices they're actually are sticky but just in the technical sense not in the sense not in the sense of how the mainstream uses the term when most people talk about sticky consumer prices especially in the wake of the SE September CPI which was characterized as potentially sticky and hot which absolutely was nothing of the sort”
Big chunks of CPI do not reflect current economic conditions today; rather, they reflect conditions from up to a year ago, meaning current CPI measurements contain substantial historical data that masks present-day conditions.
“what we're saying is that big chunks of the CPI do not reflect today what conditions are today that's the flexible part the sticky CPI is reflecting conditions from maybe six months or a year ago”
The underlying fundamentals driving inflation or disinflation continue to manifest in CPI data, but only at variable speeds depending on which price categories (sticky vs. flexible) are being measured, so the true picture of economic conditions is obscured by failure to distinguish between these categories.
“what that tells us is that the underlying fundamentals that we keep talking about here are being reflected in the CPI just at very variable speeds so while the mainstream media and even economists will run around talking about sticky CPI meaning underlying fundamentals in the technical sense what you see is that the fundamentals continue to be disinflation and as Steve and I will continue to tell you that's not good news because as you said it's about demand”
In six months' time, sticky CPI will begin reflecting the disinflationary conditions visible today in flexible prices, meaning the full disinflationary picture will gradually become undeniable as lagged prices incorporate current conditions.
“but where that becomes important is that 6 months from now the sticky CPI will reflect more and more of conditions that we see today in the fible prices which means that as I said before disinflation which is not the good news”
The term for workforce reduction through attrition (employees leaving due to changed conditions rather than formal termination) is called 'attrition' in management and HR terminology.
“yeah what do they call that attrition right they're just going to eliminate jobs instead of just firing people they're going to get them to quit”