How strong is the American economic recovery,
and how sustainable is it?
We have had a number of pieces of excellent economic news
in recent weeks, the most important of which
is a sustained decline in unemployment,
with some two million Americans returning
to work in May and another three million in June.
This is fantastic.
But there is a disturbing undercurrent in the data.
Almost all of the jobs that were created in May and June
were the result of the reversal of temporary layoffs
in industries like restaurants and hospitality.
The trend in permanent layoffs is
pointing the opposite direction, with some two million Americans
losing their jobs permanently in those two months.
So which is the more indicative and important trend, the fall
in temporary unemployment or the slow increase
in permanent unemployment?
The recent spike in Covid-19 cases around the country
might suggest that the fall in temporary employment
is a fluke driven by the premature reopenings
of several states.
The stock market, however, does not think so.
It remains near its highs and has
responded to the news of rising caseloads with a shrug.
But once again, in another corner of the market,
there is a more negative counter-narrative.
Bond yields are flat on their backs, which
is, at least traditionally, an indication
of very low expectations for economic growth.
And real or inflation-adjusted yields
are even lower, as inflation expectations
have been picking up.
You can see those expectations and some investors' underlying
worries in the rising price of that old safe haven - gold.
So as with the unemployment numbers,
you have a choice of trends, the cheerful stock market
or the gloomy bond market.
One way to resolve this apparent contradiction
is to lay it all at the feet of the Federal Reserve
and argue that the only reason that yields are so low
is because of the Fed's activism and that low yields, in turn,
force investors to buy stocks.
Perhaps, but the idea that the markets are simply
dancing to the Fed's tune while they
ignore economic fundamentals is not a very cheerful narrative
either.