RThe recent news that US bank deposits have fallen for the first time since 2018 shows that the Federal Reserve’s efforts to slow the economy are having an impact.
From the Fed’s perspective, a slowdown in money supply growth, which includes demand deposits, which are currently declining, is a necessary first step in reducing economic activity and potentially reducing inflation. But the latest CPI read – which shows the August total rose 8.3% year-on-year, almost mirroring the 8.5% seen in July, even with falling petrol prices – tells us that efforts to contain inflation to curb will not be easy .
With inflation stubborn, employment, the main source of personal income in the US, is now the top concern. Will the Fed’s continued monetary growth cut weaken employment before bringing inflation down?
A quick look at the annual growth in demand deposits, vacancies and employment for the past five years, shown in the chart below, sheds some light on the matter. (Please note that the axes marked in this way are calibrated differently due to the depiction of the three time series.)
First, consider demand deposits, the money side of the matter. The chart shows explosive growth from 2020 through early 2022 as Presidents Trump and Biden showered the economy with stimulus money. Note that year-over-year growth exceeded 120% in early 2021. As readers of these comments know, this provided fuel for later inflation. But what about job growth? Has all that printing money created jobs?
A second look, this time at the chart’s red line, shows similarly explosive growth in job vacancies, which lagged demand deposit growth by several months. After all, it takes time for business people to recognize and respond to the increasing demand for goods and services. But vacancies are not just jobs. For job growth to take place, the unemployed – including in some cases those who receive generous government grants – need to show up and fill the jobs. did this happen
A third look at the chart, now at the green line, tells us what happened. no There was some job growth, but nothing to compare with job vacancies. As such, the chart is an abstract view of the Hire Now signs we all see when we shop. Yes, there are many vacancies, but there is still not a great deal of confusion in the job markets to fill them.
What about the current picture?
The chart tells us that demand deposit growth has actually declined sharply. The Fed is working to cool the economy and private employers are getting the message that job creation growth is plummeting. Finally, we see that employment growth has remained stable.
What does that mean for the future?
It’s possible that the decline in job vacancies – what we had available but didn’t use – is the big shock absorber holding the economy up from a severe recession as the Fed continues to slam on the brakes. And given the lag between changes in demand deposit growth and changes in employment, we could look to the final quarter of 2023 to see the stronger employment impact of efforts to combat inflation. This is likely to be the case when job openings stop growing and employment growth is zero or less.
Meanwhile, storm clouds are gathering on the horizon.
Bruce Yandle is a Distinguished Adjunct Fellow at the Mercatus Center at George Mason University, Dean Emeritus of Clemson College of Business and Behavioral Sciences, and former Executive Director of the Federal Trade Commission.
