by John Mauldin
Fed Chairman Jerome Powell believes the US unemployment rate, officially at 6.3% in January, is clearly understated. That rate is likely closer to 10%, if they include those who left the labor force because of the pandemic.
That isn’t the only data in need of adjusting. Just look at the Labor Department’s business birth/death estimates. Those are aspirational. You can’t know the real number for at least a year, so they make the best estimate they can.
However, the “past performance” data the estimates are based on is clearly broken now that 150,000 (if not more) businesses closed in less than a year. Using that estimate forces the unemployment rate artificially lower. Their models no longer apply to the world we live in.
My friend Philippa Dunne at TLRanalytics describes an alternative survey by researchers working with the Dallas Fed. It pegs the January unemployment rate at 11.4%, vs. the 6.3% official number. I’ll bet you a dollar to 40 doughnuts Powell is looking at that model or something like it.
Add all this together and inflation is a risk, but I don’t see it as a major one. An output gap—when potential GDP exceeds actual GDP—combined with above-10% unemployment is not the stuff inflation is made of.
Yes, the latest coronavirus relief plan could temporarily raise the relatively benign inflation we see today. But it will be transitory.
And if inflation does jump? It would mean we’re done with the virus.
That might not be such a bad trade-off.