Category: Macroeconomics

What’s Happened to Male Employment?

Image generated by ChatGPT

On this Labor Day, we look at an important issue: In recent years, women have been faring better than men in the job market. The following figure shows that, for workers 20 years and older, men still hold more jobs than women do, but the gap has been closing. For example, as measured by the household survey conducted by the Bureau of Labor Statistics (BLS), between January 2022 and August 2026, there was a net increase of 5,829,000 jobs in the United States. More than two thirds of those jobs were filled by women.

In recent months, the business press has begun to focus on this issue. Here are some recent headlines: “A Changing Job Market Leans Against Men,” “In This Job Market, Women Have the Upper Hand,” and “Young Men Are Abandoning the Workforce.” In Macroeconomics, Chapter 9 (Economics, Chapter 19), we discuss the employment-population ratio, which measures the fraction of the working-age population of a particular segment of the population that is employed. The following figure shows that the employment-population ratio for prime-age men—those aged 25 to 54—has been slowly trending downward for decades (the blue line), while that ratio has generally been increasing for women (the orange line). 

In March 1953, the employment-population ratio for prime-age males reached a peak of 96.0 percent. In August 2026, the ratio was 85.8 percent. If prime-age males were working in 2026 at the rate that they did in 1953, 10 million more men would be working today than actually are.

The following figure makes clearer the differing trends in men and women’s employment-population ratio in recent years. In this figure, the values for both ratios are set equal to 100 in January 2000. Since that time the employment-population ratio for prime-age women (the orange line) has increased by 1.1 percent, while the ratio for men (the blue line) has declined by 4.1 percent.

Why do a smaller fraction of prime-age men have jobs today than in the past? A large number of explanations have been offered, both in the business media and by academic economists. One key factor, as shown in the following figure, is that women (the orange line) are now more likely to earn a college degree than are men (the blue line).

The fraction of jobs requiring a four-year degree has been increasing over time, a trend that the BLS projects will continue. As the following figure shows, men with a bachelor’s degree or more have a higher employment-population ratio than do men with only a high school degree. (Note that the data in this figure are for all men 25 years and older, not just for prime-age men. The average age of men has been rising, which lowers the employment-population ratio as an increasing fraction of men become of retirement age. These data are not available on a seasonally-adjusted basis, which accounts for the choppiness in the figure.) As men have fallen behind in earning college degrees, more men have found themselves unqualified to be hired in some jobs.

An article in the Wall Street Journal used BLS data to divide jobs primarily held by women and those primarily held by men. As the following figure from the article shows, jobs help primarily by women have been increasing faster than those held by men.

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As we noted in a blog post earlier this year, health care jobs have come to dominate U.S. employment growth. The following figure shows monthly changes in health care and social assistance jobs (the blue bars) and monthly changes in total employment (the red bars) for each month since January 2025. During this time period, net employment in health care and social assitance increased by 1,027,300 jobs. All other job categories experienced a decrease of 268,300 jobs. Women account for 77.9 percent of health care and social assistance workers. In other words, the number of jobs in industries dominated by men have been declining.

Image generated by ChatGPT

If you look again at the graph showing changes in the employment-population ratio for prime-age men (the second graph in this blog post), you’ll notice that there seems to be a ratchet effect in the data: The employment-population ratio declines during each recession (shown by the gray bars in the figure) and then struggles to return to its pre-recession level. It’s unsurprising that the male employment-population falls sharply during recessions, because, as we discuss in Macroeconomics, Chapter 13 (Economics, Chapter 23) spending on residential construction and consumer durables, such as automobiles and appliances, falls sharply during a recession.In 2025, men were 86.8 percent of workers in construction and 77.9 percent of workers in manufacturing. (In fact, as we note in that chapter, the late Edward Leamer of the University of California, Los Angeles, went so far as to argue that “housing is the business cycle.”)

Image generated by ChatGPT

Just before the Great Recession and Global Financial Crisis of 2007–2009, the prime-age male employment-population ratio was 88.0 percent, a level it hasn’t attained since. (In a recent blog post, we discuss the role the bankruptcy of the Lehman Brothers investment bank played in the financial crisis.) The prolonged unemployment experienced by some male workers in construction and manufacturing may have led to their skills deteriorating, making it more difficult for them to find employment during the following economic recovery. Some of these workers may have dropped out of the labor force resulting in a decline in the employment-population ratio.

One explanation for the declining employment-population ratio for prime-age males that has received significant attention in the media is the increased appeal of video games. Or, as the headline of an article in the New York Times put it: “Why Some Men Don’t Work: Video Games Have Gotten Really Good.” The U.S. Census Bureau annually conducts the American Time Use Survey, which is published by the BLS. The following figure shows that young adult men have increased the time they spend playing games. In 2003, men aged 21 to 30 spent an average of 2.23 hours per week. In 2025, they spent an average of 7.75 hours per week, down from a peak of 8.56 hours per week in 2022.

Mark Aguiar, of Princeton University, and colleagues argue that the increase in time young men devote to playing video games and engaging in other “recreational computer activities” has significantly reduced the amount of hours that some young men work. There has, however, been an academic debate over this contention. First, it’s unclear which way the causality runs: Do young men work less because they find playing video games particularly attractive or has the ability of young men to find jobs declined, so they spend time playing video games that they would rather spend working? Second, older prime-age males, who have not increased their time playing video games by as much, have also experienced a falling employment-population ratio.

There have been a number of other changes in labor markets and in American society that may have contributed to the decline in employment of prime-age males. ChatGPT offers the following summary of the various factors:

“I would rank the explanations this way:

  1. Most important: the disappearance of stable, comparatively well-paid routine and manual jobs available to men without college degrees, together with slow occupational and geographic adjustment.
  2. Closely related: educational and skills differences, the concentration of new employment in female-heavy service sectors, and the difficulty men face moving into those jobs.
  3. Important amplifiers: chronic health problems, mental illness, pain, opioids and other substance abuse, and the long-term effects of recessions and prolonged joblessness.
  4. Important for particular groups: criminal records, incarceration, geographic isolation, and weak local labor markets.
  5. Reinforcing social mechanisms: delayed marriage and parenthood, living with relatives, weaker social expectations concerning steady work, and reduced connection to employers and communities.
  6. Real but often overstated: disability benefits, other public assistance, and video games.

The central academic message is therefore different from the most sensational press version. It is not principally that millions of otherwise successful men suddenly preferred video games or welfare to jobs. The decline began with a weakening of the kinds of labor-market opportunities historically available to noncollege men. Health, addiction, criminal records, family change, geographic immobility, and more attractive leisure then made the resulting withdrawal from employment more persistent.”

Unexpectedly Strong August Jobs Report

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This morning (September 4), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for August. The report showed an unexpectedly large increase in employment.

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.) 

According to the establishment survey, there was a net increase of 162,000 nonfarm jobs during August.  Economists surveyed by the Wall Street Journal had forecast an increase of only 55,000 jobs.  Economists surveyed by FactSet had forecast a net increase of 65,000 jobs. The BLS revised upward its previous estimates of employment in June and July by a combined 55,000 jobs. The estimate of the net employment change in July was revised from a decrease of 23,000 to an increase of 21,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure shows that since peaking in March with a net increase of 214,000 jobs, job growth slowed markedly over the following four months until strongly rebounding in August. In 2026, monthly net employment growth has averaged 80,375. That is much higher than the 2025 average monthly employment growth of only 9,667, but well below the 2024 average monthly employment growth of 121,583.

The unemployment rate, which is calculated from data in the household survey, was 4.1 percent, unchanged from July. The estimated size of the labor force, the number of workers employed, and the number of workers unemployed all increased in August. The following figure shows that the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since June 2024. The Federal Open Market Committee’s most recent estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, currently the unemployment rate is slightly below that estimate of the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 569,000 jobs in August, far larger than the net increase in employment shown in the establishment survey. Since January, the household survey has shown a net increase in jobs in only two months, with a total net decrease of 326,000 jobs over the period. In contrast, the establishment survey has shown a net increase of 643,000 jobs over the same period. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In August, the ratio was 80.4 percent, unchanged from July. The prime-age population ratio can show volatility from month to month but has remained above 80 percent every month since December 2022.

The rapid adoption of artificial intelligence (AI) by many firms has led to forecasts of substantial layoffs of workers in information systems. The following figure shows net employment changes in the BLS employment category of “computing infrastructure providers, data processing, web hosting, and related services.” Employment in this sector has been declining during most months since the beginning of 2023. In August, there was a net decrease of 7,700 jobs.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in earlier posts, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is AHE. AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in AHE from the same month in the previous year. AHE increased 3.1 percent in August, down from 3.2 percent in July. That was the smallest increase since May 2021. The rate of increase in AHE has been below 4.0 percent each month since August 2025, indicating that cost pressure from wage increases has not been a significant source of price inflation during the past year.

With inflation having been above the Federal Reserve’s 2 percent annual target every month since March 2021, there has been an expectation that the Fed’s policymaking Federal Open Market Committee (FOMC) would increase its target for the federal funds rate at least once before the end of 2026. At the FOMC’s last meeting in late July, three members of the committee voted to increase the target, an unusual amount of dissent from a committee decision. 

Do today’s surprisingly strong employment data increase the chance that the FOMC will raise its target range for the federal funds rate at its next meeting on September 15–16? Investors in the federal funds futures market believe that the answer is “yes.” Yesterday, trading in the federal funds futures market indicated that investors assigned a 49.4 percent probability to the committee increasing its target range by 0.25 percentage points (25 basis points) at that meeting. This afternoon, that probability had increased to 58.4 percent. The probability that the committee will have increased its target range by at least 25 basis points from its current range of 3.50 percent to 3.75 percent after its meeting on October 27–28 increased from 62.8 percent yesterday to 69.4 percent this afternoon.

The BLS will release its estimate of inflation as measured by the consumer price index next Friday. That report will provide further evidence on the current state of inflation and may have a significant effect on the decision the FOMC makes at its meeting the following week.

Fed Chair Warsh Takes a More Hawkish Stand in Address at Jackson Hole

Federal Reserve Chair Kevin Warsh (Photo from federalreserve.com)

Each year since 1982, the Federal Reserve Bank of Kansas City has sponsored an economic policy symposium in Jackson Hole, Wyoming. (The site was supposedly first chosen in the hopes that Fed Chair Paul Volcker would attend because of the opportunities for fly fishing in the local area.)

In most years since 1989, the Fed chair has given the keynote address at the symposium. The address gives the Fed chair a chance to provide his or her assessment of the state of the U.S. economy and the outlook for inflation and employment—the two parts of the dual mandate Congress has given to the Fed.

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This year’s address by Fed Chair Kevin Warsh was highly anticipated. In his press conference following the last meeting of the Fed’s policymaking Federal Open Market Committee (FOMC), Warsh reiterated his determination to bring inflation back to the Fed’s 2 percent annual target. But he faced a number of questions from reporters as to why, with inflation running well above 2 percent, he wasn’t advocating an increase in the FOMC’s target for the federal funds rate. Warsh has stated that he wantesto steer the committee from using forward guidance to affect interest rates. Accordingly he was reluctant to state explicitly what direction Fed policy might take.

Investors in the bond market appear to have interpreted Warsh’s statements as “dovish”; that is, they believed that his reluctance to support rate increases indicated that inflation might remain above the Fed’s target for longer. As we discussed in earlier blog posts, when investors believe that inflation will be higher they require that bond yields rise enough to compensate them for the additional purchasing power. (As we discuss in Money, Banking, and the Financial System, Chapter 4, economists refer to the increase in nominal interest rates following an increase in the expected inflation rate as the Fisher effect.) The rise in the yield on the 30-year Treasury bond in the days following Warsh’s press conference likely reflected bond investors expecting somewhat higher inflation than they had previously.

In today’s address, Warsh attempted to counter the conclusion that he is reluctant to increase interest rates to slow the rate of inflation. First, though, he repeated his opposition to Fed chairs routinely engaging in forward guidance: “Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray. And I believe when policymakers make quasi-commitments on interest rates through the cycle, we inhibit our own freedom to make the right calls when it’s time to decide.”

He again stated forcefully his commitment to the Fed’s inflation target: “The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target. … It is the Fed’s job to deliver stable prices.” He noted that all measures of inflation “tell a similar story: Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices.”

Warsh also observed that “progress over the past two years [toward the 2 percent target] has been modest.” He concluded that: “There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.”

The following figure from the Wall Street Journal reflects the bond market’s immediate reaction when the text of Warsh’s address was released.

The two-year Treasury note is directly affected by investors’ expectations of the future path of the federal funds rate. (We discuss this link in Money, Banking, and the Financial System, Chapter 5.) Investors interpreted Warsh’s address as indicating he would take a more “hawkish” view of the need to raise the FOMC’s target for the federal funds rate than he had appeared to take in his earlier press conference.

Investors in the federal funds future market also quickly revised their expectations of the likelihood of the FOMC raising its target for the federal funds rate. Trading in the futures marker resulted in the probability increasing from 35.4 percent yesterday to 57.5 percent this afternoon of the committee raising its target range for the federal funds by 0.25 percentage points (25 basis points) at its next meeting on September 15–16. The probability that after the meeting on October 27–28, the committee will have raised its target range by at least 25 basis points increased from 52.6 percent yesterday to 70.7 percent this afternoon.

New BEA Releases Show Steady Inflation and Higher Output Growth

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The Bureau of Economic Analysis (BEA) released two reports this morning (August 26): “GDP (Second Estimate) and Corporate Profits, 2nd Quarter 2026” and “Personal Income and Outlays, July 2026.” The BEA’s second estimate is that real GDP grew at annual rate of 1.5 percent in second quarter of 2026, which is unchanged from the BEA’s initial estimate released last month and is equal to the forecast of economists surveyed by the Wall Street Journal. 

As we’ve discussed in previous blog posts, to better gauge the state of the economy, Federal Reserve policymakers often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased at an annual rate of 4.2 percent in the second quarter, up from 3.9 percent in last month’s initial estimate. The growth rate in real final sales to domestic purchasers was more than twice the rate of growth of real GDP, as well as far above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding rapidly, as opposed to the much weaker growth shown by real GDP data. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in a recent blog post, Fed Chair Kevin Warsh indicated in his press conference following the July meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Warsh may have intended this statement to reassure financial markets that there would be continuity in the Fed’s measure of inflation. However, some investors appear to have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

In other words, some investors believe that in the future the FOMC might be willing to accept higher levels of PCE inflation. Perhaps in response to this interpretation, the yield on the 30-year U.S. Treasury bond increased in the days following Warsh’s press conference. Higher expected inflation can lead to lower bond prices and higher bond yields. (We discuss this point in Money, Banking, and the Financial System, Chapter 5, which is now available in a new edition.) Warsh is scheduled to speak on Friday at the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium. His speech will cover his views on the current state of the economy and may give clues as to the future monetary policy actions he may support.

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The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In July, headline PCE inflation was 3.7 percent, unchanged from June. Core PCE inflation in July was 3.3 percent, also unchanged from June. Headline PCE inflation was slightly higher than forecast by economists surveyed by the Wall Street Journal, while core PCE was equal to the forecast. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation increased from –1.3 in June to 1.9 percent in July. Core PCE inflation increased from 1.8 percent in June to 3.0 percent in July. Headline inflation was very low in June—prices actually fell during the month—largely because of falling gasoline prices. Today’s data show here was a noticeable acceleration in inflation during July. Of course, it’s important not to overinterpret the data from a single month.

Fed policymakers believe that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices rise, the prices of financial services included in the PCE price index also rise. Former Fed Chair Jerome Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 3.5 percent in July, unchanged from June. Core market-based PCE inflation was 3.0 percent in July, also unchanged from June. So, both market-based measures show inflation in July remaining well above the Fed’s 2 percent target.

Fed Chair Kevin Warsh argued in testimony at his confirmation hearing before the Senate that the Fed should stop relying on headline PCE inflation: “The measures [of inflation] I prefer are looking at things that are called trimmed averages. We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.” 

Trimmed-mean PCE inflation drops the 31 percent of goods and services with the highest inflation rates and the 24 percent of goods and services with the lowest inflation rates. A closely related measure, median PCE inflation, is calculated by listing the inflation rate in each individual good or service included in the PCE and identifying the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. 

The following figure shows headline PCE inflation the (red line), core PCE inflation (the brown line) and trimmed-mean PCE inflation (the blue line). Trimmed-mean PCE inflation in July was 2.3 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In July, median PCE inflation was 2.7 percent, which was unchanged from June. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have had little effect on the views of investors who buy and sell federal funds futures contracts. These investors believe that the FOMC will likely not raise its target for the federal funds rate at its meeting on September 15–16 as some analysts have speculated. The probability that the committee will leave its target range unchanged at 3.50 percent to 3.75 percent declined only slightly from 60.4 percent yesterday to 59.9 percent this afternoon. Investors assign a probability of 54.7 percent to the FOMC raising its target range by o.25 percentage points (25 basis points) at its meeting on October 27–28.

Did the British Government Cause the Global Financial Crisis?

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When did the recession that began at the end of 2007 turn into the Global Financial Crisis?  Most economists believe a key turning occurred on Monday, September 15, 2008, when the Lehman Brothers investment bank declared bankruptcy. By the time Lehman failed, the U.S. economy was already in a recession caused by the effects on financial markets of the sharp decline in housing prices. Many financial firms had invested in mortgage-backed securities, which are bundles of mortgage loans that function like a bond. Just as an investor can buy a bond issued by Amazon, an investor can buy a mortgage-backed security issued by a government agency of a financial firm.

The decline in housing prices, increased the number of people who defaulted on their mortgages. Rising mortgage defaults sharply reduced the value of mortgage-back securities, causing some financial firms that had invested in these securities to become insolvent. When Lehman declared bankruptcy and defaulted on its debts, other firms found it difficult to borrow money. The resulting credit crunch, led to falling production and employment.

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(Some of the following is a modified version of the discussion in Money, Banking, and the Financial System, Chapter 12. The new fifth edition of the text is now available.) The effect of Lehman’s failure can be seen in movements in an index of financial stress compiled by the Federal Reserve Bank of St. Louis. The index is an average of 18 financial variables, including spreads between interest rates on corporate bonds and Treasury securities, that tend to increase during periods when investors engage in a flight to safety and households and firms face difficulty securing credit. The following figure shows movements in the index from immediately before to immediately after the recession of 2007–2009. The average value of the index is zero, with periods of greater-than-normal financial stress having positive values and periods of lower-than-normal financial stress having negative values.

The figure shows that following the failure of Lehman, financial stress jumped dramatically. As households and firms had difficulty obtaining credit and as uncertainty about the economy markedly increased, spending declined sharply. The spending declines resulted in a contraction in production and employment. From the beginning of the recession in December 2007 to the failure of Lehman, total employment in the United States declined by 1.6 million. From the failure of Lehman through the end of 2009, employment declined by an additional 7 million. This employment decline was by far the largest in such a brief period in U.S. history to that time. (Although during the Covid pandemic employment declined by 20 million in April 2020, it began increasing the following month.)

Policymakers and economists have offered two main explanations for why the Fed did not take steps that might have kept Lehman out of bankruptcy:

1. Criticism by members of Congress over the actions the Fed had taken in March 2008 to save the Bear Stearns investment bank coupled with fear of increasing moral hazard in the financial system led the Fed to allow Lehman to declare bankruptcy.

2. Provisions of the Federal Reserve Act tied the Fed’s hands and made it impossible for the Fed to legally save Lehman.

If correct, explanation 1 means that the Fed could have saved Lehman but chose not to, while explanation 2 means that, legally, the Fed could not have saved Lehman even if it had wanted to do so.

Ben Bernanke served as Fed chair during the financial crisis. In his memoirs, published in 2015, Bernanke argued that because Lehman was insolvent, the Federal Reserve Act barred the Fed from saving it:

“It became evident that Lehman was deeply insolvent. . . . Lehman’s insolvency
made it impossible to save with Fed lending alone. . . . We were required [by the
Federal Reserve Act] to lend against adequate collateral. The Fed had no authority to inject capital or (what is more or less the same thing) make a loan that we were not reasonably sure could be fully repaid.”

But was Lehman Brothers actually insolvent? After Lehman’s bankruptcy, some of its creditors were paid back less than what the firm owed them, which seems to indicate that the value of the firm’s assets was less than the value of its liabilities—the definition of insolvency. But economist Laurence Ball of Johns Hopkins University has disputed Bernanke’s account. Ball argues that there is no evidence that Fed policymakers were concerned about Lehman’s solvency at the time they were considering whether to make loans to the bank. Ball believes that Lehman did have sufficient collateral to secure a loan that would have met its short-run liquidity needs. He also notes that the Federal Reserve Act, as it was in 2008 (before it was subsequently amended by the Dodd–Frank Act in 2010), did not keep the Fed from making loans to insolvent firms, provided that the loan being made was secured by adequate collateral. In other words, the fact that Lehman proved to be insolvent once it declared bankruptcy did not necessarily preclude the Fed from making loans large enough to have kept the bank from failing.

Image of then Fed Chair Ben Bernanke and then Secretary of the Treasury Henry Paulson generated by ChatGPT.

Ball argues that explanation 1 above is the reason that the Fed allowed Lehman to fail. In particular, he believes that Treasury Secretary Henry Paulson was heavily involved in the decision and that he was sensitive to the political criticism he had received following the actions the Treasury and Fed had taken to save Bear Stearns the previous spring.

In a recent book, Tyler Goodspeed, chief economist of ExxonMobile and chair of the Council of Economic Advisers during the first Trump administration, has discussed a sometimes overlooked aspect of Lehman’s failure. Goodspeed notes that as Lehman neared bankruptcy, Barclays, a British bank, indicated that it was interested in buying Lehman. According to Goodspeed on Sunday September 14:

“Keen to ensure that Lehman could open for business Monday morning, the U.S. Treasury and Federal Reserve insisted that any buyer guarantees Lehman’s trades. But [United Kingdom] securities regulations required that unless the UK Financial Services Authority (FSA) issued a waiver, such a guarantee would require a vote of Barclays shareholders.”

Given that Lehman was prepared to declare bankruptcy the next day, there wasn’t sufficient time to conduct a vote of Barclays shareholders. The head of the FSA told U.S. financial regulators that he was unwilling to grant a waiver that would have allowed Barclays purchase of Lehman to go through. Treasury Secretary Paulson appealed directly to U.K. Chancellor of the Exchequer Alistair Darling to approve the needed waiver. (The chancellor of the exchequer is the equivalent in the U.K. government of the U.S. secretary of the treasury.) Darling was unwilling to do so however, because he feared that buying Lehman might weaken Barclays financial condition, potentially calling the bank’s solvency into question.

Image created by ChatGPT of the headquarters of the U.K. Treasury

In his memoir, Bernanke gives a similar account:

“{Treasury Secretary] Hank [Paulson] reported that he appealed to his British counterpart, Alistair Darling, chancellor of the exchequer, for a waiver of the shareholder approval requirement. Darling refused to cooperate on the grounds that suspending the rule would be ‘overriding the rights of millions of shareholders.'”

The failure of the British financial regulators to allow Barclays to purchase Lehman made it inevitable that Lehman would declare bankruptcy the following morning. Lehman’s failure led to turmoil in both the U.S. and U.K. financial systems, helping to transform the recession that had already begun in the United States the pervious December into the Global Financial Crisis.

However, the role played by British regulators in Lehman’s bankruptcy is not entirely clear-cut. An article in the Financial Times published late on the afternoon of Sunday, September 14, discussed the attempts to save Lehman from bankruptcy. The article indicates that executives at Barclays saw U.S. financial regulators, not U.K. financial regulators, as responsible for stopping their purchase of Barclays.

According to the article, U.S. regulators were unwilling to guarantee Lehman’s transactions for a period long enough for Barclays to complete the purchase. Barclays would have had to guarantee Lehman’s transactions without funding from U.S. regulators. According to a statement issued by Barclays,“The proposed transaction required a guarantee for the trading operations of Lehman Brothers that was potentially open-ended, and we were not willing to provide that guarantee.”

After nearly 100 years, economists still debate whether the Fed could have acted to avoid the panic panics of the 1930s that significantly worsened the Great Depression. The debate over the failure of Lehman Brothers in 2008 is likely to also continue for years to come.

As Expected, CPI Inflation Falls Slightly in July

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Today (August 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for July. Lower energy and grocery prices contributed to a slight decline in the inflation rate in July compared with June.

The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

  • The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 3.4 percent in July, down from 3.5 percent in June. 
  • The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in July, down from 2.6 in June.  

Headline inflation and core inflation were both equal to the forecasts of economists surveyed by FactSet. (Note that because of last year’s federal government shutdown, inflation data for October 2025 are not available.)

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, both headline (the blue line) and core inflation (the red line) increased in July from the negative values in June. That is, the U.S. economy experienced deflation in June because the price level, measured by the CPI and by the CPI less food and energy prices, fell in that month.

In July, 1-month headline CPI inflation was 0.9 percent and 1-month core CPI inflation was 2.6 percent.

The following figure illustrates the role played by energy prices in contributing to the large swings in the monthly inflation rate since the conflict in Iran began at the end of February. The red line shows the 1-month inflation rate in all energy prices included in the CPI. Inflation in energy prices, which had increased at annual rate of 245 percent in March, declined at an annual rate of 16.4 percent in July. The blue line shows the 1-month inflation rate in gasoline prices, which in March had spiked to more than 900 percent measured at an annual rate, declined at an annual rate of 29.4 percent in July. A return to full-scale hostilities in the Middle East would increase oil prices, which would likely lead to an increase in the U.S. inflation rate.

There had been a fear that the rise in energy prices that began in March would pass through to increases in food prices, which are a key concern for many consumers. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at grocery stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in grocery prices, which increased 2.3 percent in June, declined 0.9 percent in July. Inflation in food prices away from home increased from 2.8 percent in June to 3.8 percent in July. To this point, increases in energy priced do not seem to have caused a significant increase in either grocery prices or restaurant prices.

Today’s relatively good inflation report, following last week’s report showing an unexpected decline in employment, has likely reduced the chance that Federal Reserve policymakers will increase their target for the federal funds rate at the next meeting of the Federal Open Market Committee (FOMC) on September 15–16. In trading in the federal funds futures market this afternoon, investors assigned a 62.1 percent probability to the FOMC keeping its target unchanged at that meeting, which was up from a 51.6 probability yesterday. Traders assign a 53.2 percent probability to the committee increasing its target at its October 27–28 meeting, down from 62.2 percent yesterday.

It’s worth noting, however, that inflation is still running above the Federal Reserve’s 2 percent annual inflation target. In testimony before Congress in a hearing on his nomination as Fed Chair, Kevin Warsh cautioned that good news in a single month’s inflation report should be treated with caution. Warsh has intentionally moved away from discussing the circumstances under which monetary policy might change in the future—so-called forward guidance. (We discuss forward guidance in Macroeconomics, Chapter 15 (Economics, Chapter 25)). Uncertainty about actions the FOMC may take during its three remaining meeting this year remains high.

Employment in July Unexpectedly Declined

This morning (August 7), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for July. The report showed a decline in employment. 

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.) 

According to the establishment survey, there was a net decrease of 23,000 nonfarm jobs during July.  Economists surveyed by the Wall Street Journal had forecast an increase of 83,000 jobs.  Economists surveyed by FactSet had forecast a higher net increase of 100,000 jobs. The BLS revised downward its previous estimates of employment in May and June by a combined 103,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure shows that since peaking in March with a net increase of 214,000 jobs, job growth has slowed markedly over the last four months. Over the last three months, we’ve seen only an average of 20,000 net new jobs created.

The slow pace of recent job growth is consistent with the view among some economists that slowing labor force growth has driven the break-even rate of employment growth—the rate required to keep the unemployment rate constant—down to nearly zero

Despite the decrease in employment in July, the unemployment rate, which is calculated from data in the household survey, declined to 4.1 percent from 4.2 percent in June. The decline in the unemployment rate was due to a decline in the estimated size of the labor force. Although the estimated size of the labor force can fluctuate significantly from month to month, July was the fifth month in a row during which the labor force is estimated to have declined. Despite that fact, as the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since June 2024. The Federal Open Market Committee’s current  estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, currently the unemployment rate is slightly below that estimate of the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 87,000 jobs in July, roughly similar to the net decrease in employment shown in the establishment survey. Since January, the household survey has sown a net increase in jobs in only one month, with a total net decrease of 1.8 million jobs. In contrast, the establishment survey has shown a net increase of 426,000 jobs over the same period. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In July, the ratio increased to 80.4 percent, partially reversing the sharp decline in June. The prime-age population ratio can show volatility from month to month but has remained above 80 percent every month since December 2022.

There have been media reports of firms, including Salesforce, Cloudflare, Coinbase, Cisco Systems, and Meta Platforms, laying off workers in information systems. The following figure shows net employment changes in the BLS employment category of “computing infrastructure providers, data processing, web hosting, and related services.” Employment in this sector has been declining during most months since the beginning of 2023. July was an exception with a net increase of 2,400 jobs.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in earlier posts, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is AHE. AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in AHE from the same month in the previous year. AHE increased 3.2 percent in July, down from 3.4 percent in June. The rate of increase in AHE has been below 4.0 percent each month since August 2025, indicating that cost pressure from wage increases has not been a significant source of price inflation during the past year.

With inflation having been above the Federal Reserve’s 2 percent annual target every month since March 2021, there has been increasing speculation that the Fed’s policymaking Federal Open Market Committee (FOMC) would increase its target for the federal funds rate at least once before the end of 2026. At the FOMC’s last meeting in late July, three members of the committee voted to increase the target, an unusual amount of dissent from a committee decision.

Does the slowdown in employment growth in recent months reduce the chance that the FOMC will increase its target range for the federal funds rate at its next meeting on September 15–16? Investors in the federal funds futures market believe that the answer is “yes.” Yesterday, investors assigned only a 45.0 percent probability to the committee keeping its target rate unchanged. This afternoon, that probability had increased to 55.9 percent. The BLS will release its estimate of inflation as measured by the consumer price index next Wednesday. That report will provide further evidence about the current state of inflation.

What Explains the Rise in 30-Year Treasury Yields?

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At the close of trading on Friday, July 31, the yield on the 30-year Treasury bond was 5.28 percent. As the following figure shows, that yield was the highest since July 2007, before the Global Financial Crisis and the Great Recession of 2007–2009.

Note: As we discuss in Money, Banking, and the Financial System, Chapter 3, when economists refer to the interest rate on a bond, they are referring to the bond’s yield to maturity. (A new edition of our textbook is now available.)

The figure shows the nominal yields on the 30-year Treasury bond—the yield not corrected for the effects of inflation.  What factors can cause the nominal yield on Treasury bonds to increase? Because investors are interested in the real yield on Treasury bonds—the yield corrected for the effects of inflation—an increase in the expected inflation rate will cause the nominal yield to rise. The Fisher effect refers to the assertion by Yale economist Irving Fisher that the nominal interest rate on a bond rises point-for-point with increases in the expected inflation rate. Although the pure Fisher effect doesn’t typically hold, there’s no doubt that changes in the expected inflation rate are a key driver of changes in nominal bond yields.

The other main driver of nominal bond yields is changes in the demand for credit. The Congressional Budget Office forecasts that, because of continuing federal government budget deficits, the value of publicly held Treasury securities will rise “from 101 percent of GDP in 2026 to 120 percent in 2036, well above the previous record of 106 percent just after World War II.” Such substantial increases in the supply of Treasury bonds will lower their prices, raising their nominal yields.

The market for Treasury bonds is linked to the market for corporate bonds. Although not all investors who buy Treasury bonds also buy corporate bonds and vice versa, many investors participate in both markets. As a result, a surge in the supply of corporate bonds will raise both their yields and the yields on Treasury bonds. As the following figure shows, the yields on high-quality corporate bonds (those rated A, AA, or AAA), have moved roughly in synch with Treasury yields, with recent increases in corporate yields mirroring the increases in Treasury yields.

The surge in the supply of corporate bonds has been driven by so-called hyperscalers, such as Amazon, Google, Oracle, and Microsoft, who have been raising hundreds of billions of dollars to fund the building of data centers to power AI programs.

In recent days, there has been much discussion as to whether the increased supply of bonds or rising expectations of future inflation have been behind the surge in Treasury yields. Following the latest meeting of the Federal Open Market Committee (FOMC) on Wednesday, July 29, Fed Chair Kevin Warsh’s press conference left many industry analysts believing that Warsh would be willing to tolerate higher rates of inflation. If, on the other hand, Warsh had been interpreted as willing to raise the FOMC’s target for the federal funds rate in the near future, that may have reassured investors that future rates of inflation would be lower, which would have brought down Treasury yields. An article in the Wall Street Journal quoted Mark Cabana, head of U.S. rates strategy at Bank of America as saying: “If you actually want to get long-end rates down, there’s an argument that you need to raise front-end rates [that is, the target for the federal funds rate] right now in order to establish that credibility.”

The following figure from the Wall Street Journal shows that during Warsh’s press conference, the yield on the 30-year Treasury bond rose sharply.

Despite the immediate reaction of bond investors to Warsh’s press conference, there isn’t much indication that in recent weeks a significant rise in investors’ expectations of inflation has been the key driver of increases in the Treasury bond rate.

In January 1997, the U.S. Treasury started issuing indexed bonds to address investors’ concerns about the effects of inflation on real interest rates. With these bonds, called TIPS (Treasury Inflation-Protected Securities), the Treasury increases the principal, or face value, as the price level increases, as measured by the CP. The stated interest rate on a TIPS remains fixed once issued, but because it is applied to a principal amount that increases with inflation, the effective interest rate increases with inflation. For example, suppose that when issued, a 30-year TIPS has a principal of $1,000 and a coupon rate of 3%. (The coupon rate equals the coupon payment divided by the face value, or par value, of a bond.) If the inflation rate during the year is 2%, then the principal increases to $1,020. So, the investor would receive the coupon rate of 3% plus the 2% increase in the principal, or 5%. In the rare case in which the economy experiences deflation, with the price level falling, the principal of a TIPS will decrease.

If we compare the yield on a TIPS of a given maturity to the yield on a non-TIPS Treasury security of the same maturity, we have an estimate of the annual inflation rate investors expect over that time period. For example, if the yield on a non-TIPS 30-Year Treasury bond is 5% and the yield on a 30-year TIPS is 2%, investors expect an annual inflation rate of 3% over the next 30 years. The difference between the yield on the non-TIPS 30-year Treasury bond and the yield on the 30-year TIPS is called the 30-year breakeven inflation rate because at that inflation rate, an investor would expect the same real yield from buying either the TIPS or the non-TIPS bond.

The following figure shows, for the period beginning in January 2022, the daily yield to maturity on the 30-year Treasury bond (the blue line), the yield on the 30-year TIPS (the orange line), and the implied 30-year breakeven inflation rate (the green line). Note that values for the green line are usually close to 2%, which is the Fed’s long-run inflation target. Even during 2022, when inflation as measured by the CPI reached 9%, this measure of expected inflation never rose above 2.7%. When the expected inflation rate changes relatively little during a period when the actual inflation rate is fluctuating, expectations of inflation are said to be well anchored.


A reasonable conclusion is that, to this point, the rise in long-term bond yields appears to be driven more by the increasing supply of Treasury and corporate bonds than by higher expected inflation.

(We should note that some economists question the accuracy of using breakeven inflation as a measure of expected inflation for two reasons: (1) An investor buying a TIPS is protected against the possibility that the inflation rate might turn out to be higher than expected. As a result, investors may be willing to accept a slightly lower interest rate on TIPS, which would lead to an
overestimate of the expected inflation rate. (2) The volume of TIPS traded on any given day is much smaller than volume of non-TIPS Treasury securities traded, which make TIPS slightly less liquid—meaning they are slightly more difficult to sell. Investors typically require a higher interest rate to buy a less liquid asset. So, this outcome might have the opposite effect of the first one—an underestimate of the expected inflation rate.)

New BEA Releases Show Slower Growth Than Expected and Lower Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (July 30): “GDP (Advance Estimate), 2nd Quarter 2026” and “Personal Income and Outlays, June 2026.” The BEA’s initial—or advance—estimate is that real GDP grew in the second quarter of 2026 at annual rate of 1.5 percent, down from an annual rate of 2.1 percent in the first quarter. Economists surveyed by the Wall Street Journal had forecast that real GDP would grow at a rate of 1.8 percent in the second quarter. The following figure shows the BEA’s estimated rates of real GDP growth in each quarter beginning with the first quarter of 2022.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased at an annual rate of 3.9 percent in the second quarter, more than twice the rate of growth of real GDP, as well as far above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding rapidly, as opposed to the much weaker growth shown by real GDP data. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

There has been much discussion in the media of the surge in spending on new data centers to power artificial intelligence programs. This surge is reflected in following figure, which shows real domestic investment in information processing equipment. This category of investment spending has increased more than 40 percent since the fourth quarter of 2024.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in a blog post yesterday, Fed Chair Kevin Warsh indicated in his press conference following the meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Warsh may have intended this statement to reassure financial markets that there would be continuity in the Fed’s measure of inflation. However, some investors appear to have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

In other words, some investors believe that in the future the FOMC might be willing to accept higher levels of PCE inflation. Perhaps in response to this interpretation, the yield on the 30-year U.S. Treasury bond rose to its highest level since 2007. Higher expected inflation can lead to lower bond prices and higher bond yields. (We discuss this point in Money, Banking, and the Financial System, Chapter 5, which is now available in a new edition.)

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In June, headline PCE inflation was 3.7 percent, down from 4.1 percent in May. Core PCE inflation in June was 3.3 percent, down slightly from 3.4 percent in May. Headline and core PCE inflation were both equal to the forecasts of economists surveyed by the Wall Street Journal. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation declined from 5.7 percent in May to –1.3 percent in June; in other words, consumer prices fell in June. Core PCE inflation fell from 4.1 in May to 1.6 percent in June. Even leaving aside the effect of falling gasoline prices on headline PCE, these data show that in June there was a noticeable deceleration in inflation. Of course, it’s important not to overinterpret the data from a single month.

Former Fed Chair Jerome Powell frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices rise, the prices of financial services included in the PCE price index also rise. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 3.5 percent in May, down from 4.0 percent in May. Core market-based PCE inflation was 3.0 percent in June, down from 3.2 percent in May. So, both market-based measures, although lower than the full PCE measures, show inflation in June remaining well above the Fed’s 2 percent target.

Fed Chair Kevin Warsh argued in testimony at his confirmation hearing before the Senate that the Fed should stop relying on headline PCE inflation: “The measures [of inflation] I prefer are looking at things that are called trimmed averages. We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.” 

Trimmed-mean PCE inflation drops the 31 percent of goods and services with the highest inflation rates and the 24 percent of goods and services with the lowest inflation rates. A closely related measure, median PCE inflation, is calculated by listing the inflation rate in each individual good or service included in the PCE and identifying the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. 

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the red line) and trimmed-mean PCE inflation (the brown line). Trimmed-mean PCE inflation in June was 2.2 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In June, median PCE inflation was 2.7 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have reinforced the view of investors who buy and sell federal funds futures contracts that the FOMC will raise its target for the federal funds rate by o.25 at its meeting on September 15–16. That probability increased from 58.3 percent yesterday to 65.4 percent this afternoon.