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Payroll employment rose by 114,000 and unemployment is only 4.3%. Wages are up 3.6% over the past 12 months. Those are really good numbers!

Unfortunately, it’s often the second derivative that tells the real story. There are strong signs that the economy is slowing rapidly. That doesn’t necessarily mean there’ll be a recession, but I’d say there’s at least a 95% chance that one of the following two events will occur late this year:

1. A recession

2. America’s first-ever mini-recession, defined as a rise in unemployment of between 1% and 2%, before resuming its decline

When inflation got out of control in 2021-22, I suggested that we ought to be rooting for a mini-recession. Some people thought I was being too pessimistic. Now a mini-recession is the optimistic case.

To be clear, I do not regard a mini-recession as an actual recession. But disinflation never seems to be completely painless.

The Atlanta Fed estimates Q3 RGDP growth at 2.5%. I suspect that this estimate does not incorporate the latest jobs report, so that will be something to watch.

Over at Econlog, I discuss our inefficient monetary policy regime. Because Powell is basically a dove, I’d expect at least a 50 basis point cut in September. The problem here is that interest rate targeting simply doesn’t work very well—they should be targeting NGDP growth expectations. TIPS spreads are swinging wildly while the fed funds rate stays at 5.25%. Instead, interest rates should be swinging wildly as the TIPS spread remains stable. This is no way to run a modern economy.

Normally, the Fed’s FAIT policy would help at a time like this. Unfortunately, the Fed has lost a great deal of credibility on inflation, so I would not expect them to rely on another promise of “make-up inflation”.

Now do you see why I’m such a stickler for sticking to rigorous rules, even if there’s a bit of pain in the short run? It’s way easier to stabilize the economy if you have a credible, forward-looking, level targeting regime.

We do not have one.

PS. Sahm’s Rule has been triggered. So has my 2011 claim that we always have a recession when unemployment rises more than 0.8% above its cyclical low. I don’t believe there are any foolproof forecasting techniques, and I believe that a mere mini-recession is still very possible. It will be quite interesting for 6 months. “Make TheMoneyIllusion Great Again!” Wouldn’t it be wonderful if I never mentioned Trump for 6 months? No, that would mean we have an economic disaster on our hands.

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