UBS On-Air: Paul Donovan Daily Audio 'Policy and data problems'

Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 2nd of July. With the United States not working tomorrow, today sees the release of the June employment data.

These numbers are a very vague approximation of what might be happening in the US labour market. Response rates to the official surveys have collapsed and the numbers are subject to considerable revision. It is best to step back from the month-by-month fluctuations and instead take a look at the bigger picture, which remains that of a labour market where firms are not rushing to fire workers but are also not that keen to hire workers.

This has very little to do with the shiny new toy of artificial intelligence. The Federal Reserve's research has suggested that AI is causing little in the way of job losses. However, we have had a year and a half of constant policy swings, radical breaks with economic norms and then hasty retreats.

In a world of so much uncertainty, the instinct perhaps is to sit back and say, let's wait and see. The risk with that is that the defensive instincts actually take over and risk-taking becomes more permanently damaged. US Federal Reserve Chair Walsh's policy approach is to add uncertainty to the risk by trying to create an air of mystery about the future direction of Fed policy.

Walsh was keen to stress that near-term inflation prospects have fallen in remarks yesterday. The sock-puppet denial was there once again, in a slightly more formal way, with lots of protests of the Fed's independence. A couple of comments stood out from Walsh's views over the medium term.

The first was a wish to start using alternative data sources. This is a positive development inasmuch as official data and survey evidence has declined in quality so much that reliance on the precision of official numbers significantly increases the risk of policy error. A wider data set helps round out the picture.

However, it does require a level of intelligence and understanding that such data sets are also proxies, not precise measures, and it remains to be seen whether Walsh is going to apply that intelligence and understanding. The other comment was Walsh's apparent belief in the productivity pixie of AI, suggesting that it could be a strong disinflation force in the future. This is categorically not the case.

Any technological change is a relative price adjuster, affecting some prices in the economy negatively and other prices positively, hence Apple pushing up the price of their products. Thinking it will allow the economy to run away without inflation is a dangerous idea to even suggest. Any new technology should increase the output of some sectors.

More efficient production is the whole point of investing in a new technology. In doing so, it may cause some job losses. However, new jobs will be created, but, which is rather the key point, they will be created in less productive and less efficient areas.

The aggregate productivity of an economy's workforce does not automatically improve, even as there is an increase in the productivity of some sectors. The point about technological change is that it will not only potentially increase the output on the supply side in certain areas, but it will also increase the demand for, or importance of, other areas with less productive production. We did not just hear from Walsh yesterday the ECB's summer camp for central bankers displayed a fair amount of division on the ECB policy outlook, though for the near term rather than these more abstract longer-term visions.

ECB chief economist Lane is defiantly refusing to apologise for the recent policy error. Other members of the ECB are suggesting that there is not perhaps a risk of Weimar-style hyperinflation any time soon, and that things can be left as they are for the time being. Even ECB president Lagarde was noting that risks are more broadly balanced.

The idea that the eurozone economy has abruptly swung from raise rates now before it's too late to risks are more broadly balanced in the course of 20 days is of course complete nonsense. Economies do not pivot in so wild a fashion. The broadly balanced nature of risks was self-evident 20 days ago.

The ECB ignored that balance in favour of raising interest rates on a whim. There are a few more ECB speakers today. That's all for today, have a good day.

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