Certainly, it was a disappointing labor market report last week. Even though the unemployment rate only increased slightly to 9.1% from 9.0%, the worse number was the paltry gain of 54,000 jobs. Markets do not like surprises, so they did not react kindly to a result that was less than a third of what was projected. One can point to persistent rises in gas and food prices, along with global turmoil as the primary reasons for the disappoint job report. The question is whether this will be a blip in what has been fairly good gains or a sign of future deterioration.
In order to see significant improvement in the unemployment rate, we need to see consistent job growth between 250,000-300,000 over a number of months. First, we need to see this to make up for over the 8 million jobs lost during our steep recession. Also, we expect to see population gains within the labor force each month, so the number of jobs must consistently exceed that.
As expected, we continue to see a slide in public sector jobs. In particular, local government budgets continue to be strained, so layoffs remain prevalent. Of the 29,000 government jobs lost, almost 76% came from local governments. A sluggish economic recovery and reluctance to increase tax burdens of their constituents have forced them to downside operations. Overall, this job decline offset the private sector gain of 83,000.
As we look to labor market trends in the future, follow these key indicators:
- Trend in energy and food prices
- Global market events
- Monetary policy
Our housing market must improve in order to build a sustainable economy, but so far results have been less than promising. Home prices continue to drop and that remains a concern. It is promising that foreclosures are starting to fall, but they still remain at relatively high levels. Another problem is that there remains a large inventory of housing that remains vacant. Until banks can start to shrink their inventory of houses, it will be difficult to boost home prices. When home prices start to rise, that is a sign that people are buying homes and that is beneficial to economic activity. Buying a home typically leads to more purchases, such as electronics, furniture, and appliances.
Future trends in energy and food prices will obviously play a role in where our economy is going. One plus is that we have started to see gas prices fall, which is in line with a decline in crude oil prices. We can point to a more stable Middle East which has calmed market speculators. On the other hand, food prices have been consistently rising and that can be attributed to poor weather in the U.S. and global markets. Typically, energy and food prices are volatile, but have been persistently high lately.
We must also recognize the impact of the European debt crisis and earthquake impact from Japan. In our globalized economy, many American industries depend on global demand as a significant source of their income. Europe’s economic climate has deteriorated due to uncertainty with the European Union’s efforts to lift Greece from their debt crisis. Any debt relief to Greece will be burdensome to Germany and other European nations, so that can impact their spending on American goods. As for Japan, their environmental cleanup is impacting their industrial production, which has hampered U.S. auto companies that are depending on various components that go toward auto production. Then there is rising radiation that has prevented the U.S. from importing Japanese food, which can play a role in rising food prices.
While some of the above circumstances that are outside of our control are mitigating factors, it is reasonable to place some blame at the foot of the Federal Reserve. It is understandable why the Federal Open Market Committee led by Chairman Bernanke is reluctant to reverse its monetary easing policy. This policy started with extensive open market operations where bond purchases drove the Fed Funds Rate down to zero and has continued with two separate programs of quantitative easing that involved the U.S. Treasury buying short-term bonds and using its proceeds to sell long-term bonds in the hope of keeping long-term yields low. They are expected to draw down on their quantitative easing this month.
The primary goal of any monetary easing policy is to spur investment and job creation by making it easier for businesses and consumers to obtain credit. Even though the Fed has been aggressively pursuing this strategy since the recession, its results have been disappointing so far, particularly in business lending. This can be blamed by some combination of stiffer requirements to qualify for business loans and lagging demand for loans due to a sluggish economy. However there is a downside to long-term monetary easing because it can lead to a declining dollar and indirectly cause prices to rise as investors are led to invest in commodities, such as crude oil, wheat, and other agricultural products. All commodities are traded in dollars, so a cheaper dollar makes those investments more attractive.
It is understandable that the Federal Reserve is reluctant to loosen their grip on money printing due to an ineffectual Congress. The aforementioned conditions above are consistent with a liquidity trap where the economy is flooded with dollars that are not being invested back into the economy. When this occurs, fiscal policy is the main tool that needs to be used in order to stimulate economic growth. Unfortunately, Congress is very fractured and they cannot come to a consensus on whether to pursue policies focused on infrastructure spending or boost private sector investment through lower taxes and less regulation. Either policy would increase the deficit in the short-run, but both can increase job creation and economic growth.
Despite concerns in all four indicators, there are enough positives to suggest that a double-dip recession is not yet on the horizon. Even though housing prices remain low and can drop further, we can be encouraged that foreclosure rates are declining. The drop in gas and energy prices will provide comfort for consumers, but it is expected that food prices will continue to rise. It is difficult to determine what will happen in Europe and the Middle East, but neither area has entered a crisis mode yet. Despite the political risks involve, I do expect Germany to do what it takes to stabilize Greece. Lastly, it is expected that the Fed’s quantitative easing program should end this month without another dose and that should stabilize the dollar. Therefore, I remain hopeful that the labor market will rebound from May, but unfortunately, I would not expect dramatic improvement in the near future.