Last Thursday, I joined Ed Elson on Prof G Markets. Then, I went on The Trump Report to talk to Maddie Hale. Different shows with different audiences, looking at different headlines. And in both cases, the most interesting story was under the surface.
You can tell a lot of stories with data
Consumer prices rose less than analysts had expected in August — only 0.4 percent — but they’re still up 3.4 percent from a year ago. Consumer spending was also up, personal savings was down, and inflation is still running above the Fed’s target. Ed wanted to know: what do I make of this report?
My answer: this is a great report if you’re a storyteller. There’s a lot of places to take it.
Ed’s story was that 3.4% is greater than 2%. True, though an LLM might sometimes get that wrong. Another story from the past few months is that underlying price growth is closer to two-point-something percent. Then there is the story that’s most important for markets: the number came in better than expected, so you should be a little more optimistic. You can think inflation is too high and still feel better about where it’s heading.
Then, Ed pivoted to the bond market. 10-year Treasury yields have been hitting new highs, and Ed wanted to know what I make of it. I pointed out that inflation expectations, the Fed and bond markets are often mentioned in the same breath, and while that’s not wrong, it can cause a lot of confusion.
Let’s start by taking inflation out of the equation. The yield on inflation-indexed bonds has risen almost one for one with the regular 10-year bond. If the current run-up in bond yields were about inflation fears, those two would have pulled apart, but they haven’t.
Okay, so now we’re looking for factors that could shift the real interest rate.
In the short run, the Fed sets interest rates. That means they nudge them above or below the “neutral (real) rate” of interest. Economists call that r-star, because the more jargon we have, the more we can charge people to listen to us explain what’s going on. Those nudges to interest rates cool or heat the economy. Importantly, over a decade or so, those nudges roughly average out. So these Fed-induced nudges can’t really be much of the story about what’s going on with long-term bond yields.
The story for the long term requires looking at deeper market forces.
Here’s where we dust off our old friends, supply and demand. There’s a market for loans, and the interest rate is the price of a loan. When a price goes up, it’s either due to more demand or less supply. The AI build-out has boosted the demand for loans by hundreds of billions of dollars. The U.S. government is borrowing about 6% of GDP a year. That’s another demand shock. So the story is simple: When the demand for loans increases, so does the price, which is the interest rate. That’s what’s driving the long-term bond yield up.
Where is manufacturing, and why manufacturing
Then I was back on The Trump Report with Maddie Hale. She brought up a striking number: 21,000. The U.S. now has about 21,000 fewer manufacturing jobs than it did when Trump took office. What happened to that manufacturing boom?
I asked a different question: why does anyone want a manufacturing boom?
Manufacturing used to be a path to the middle class, in the 1950s and 1960s. But American workers are now highly educated and more productive in other areas: they write code, invent a new iPhone, start the AI revolution, and so on. Manufacturing wages have fallen below average wages. Pushing workers back into factories now means pushing them toward lower-paying work.
This isn’t the first time we’ve seen this play out. Two hundred years ago, most Americans worked on farms, but then farms got so productive that that division of labor didn’t make sense anymore. Now about 1% of Americans feed everyone else. We could force people back on the farm… but do we need more lettuce? Factories follow the same path. A modern factory is more robots than people and it can make all the dishwashers and car doors we need.
Do factory workers want their kids to grow up to work in factories? When you ask them, they say no. They want them to have office jobs where their backs don’t hurt.
Manufacturing is work rich people think poor people want. But, when you ask them, poor people want to do the work rich people do.
You can tune in to both conversations above for the rest.
Hi, Justin. My answer to the question is Donald Trump wants more manufacturing jobs because he's mentally stuck in 1955. Period.