Recent news that U.S. bank deposits have fallen for the first time since 2018 shows that the Federal Reserve’s effort to slow the economy is working.
From the Fed’s standpoint, a slowdown in money growth, which includes the demand deposits now in decline, is a necessary first step in reducing economic activity and, perhaps, reducing inflation. But the latest reading on the Consumer Price Index — which shows that August’s all-item number rose by 8.3% year over year, nearly mirroring July’s 8.5%, even with gasoline prices falling — tells us the effort to hammer down inflation will not be easy.
Given inflation’s stubborn hold, employment, the mainspring of U.S. personal income, is now the major concern. Will the Fed’s continued cut in money supply growth take the edge off employment before taking down inflation?
A quick look at year-over-year growth for demand deposits, job openings, and employment for the last five years shown in the nearby chart sheds some light on the matter. (Please note that the axes, so indicated, are calibrated differently due to the mapping of the three time series.)
Employment chart, Bruce Yandle
First off, consider demand deposits, the money side of the matter. The chart reveals the explosive growth that occurred from 2020 through early 2022, when presidents Trump and Biden showered the economy with stimulus money. Note that year-over-year growth exceeded 120% in early 2021. This, as readers of these commentaries know, provided fuel for inflation that would come later. But what about job growth? Did all that printing press money bring jobs?
A second look, this time at the chart’s red line, reveals similar explosive growth in job openings, which lagged the growth in demand deposits by several months. After all, it takes a while for business people to recognize that demand for goods and services is increasing and to respond. But job openings are not the same thing as jobs. For job growth to occur, unemployed people — including, in some cases, those receiving generous government aid — have to show up and fill the jobs. Did that happen?
A third look at the chart, now at the green line, tells us what happened. No. There were some mild job growth gains, but nothing to compare with job openings. Thus, the chart is an abstract view of the “now hiring” signs we all see when shopping. Yes, there are lots of openings, but still no big scramble in labor markets to get them filled.
What about the current picture?
The chart tells us that demand deposit growth has indeed plummeted. The Fed is at work cooling off the economy, and private employers are getting the message, with job opening growth heading to the basement. And finally, we see that growth in employment has held steady.
So what does this portend for the future?
It’s possible that the decline in job openings — the thing we’ve had at our disposal but failed to use — is the big shock absorber that cushions the economy from severe recession while the Fed continues to hit the brakes. And given the lag between changes in growth in demand deposits and changes in employment, we might look to 2023’s last quarter to see the tougher employment effects of the effort to wring out inflation. This projects to be about when job openings are no longer growing and employment growth is at zero or less.
Meanwhile, there are storm clouds on the horizon.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, a dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.
