This article is a guest contribution by Dr. Scott Brown, Raymond James Equity Research.
Near-term economic expectations have softened over the last few months and the risks to the growth outlook have become tilted more to the downside. There’s nothing to suggest that a double dip recession is imminent or even likely over the next few quarters. However, the one element that’s hard to get a handle on is psychology. Fears of a double dip could become self-fulfilling if enough firms stop hiring.
The June Employment Report seemed to encapsulate the themes generated by recent economic data releases. That is, the pace of growth appears to have moderated – still positive, but somewhat slower than was anticipated a few months ago. Private-sector payrolls continued to advance in June and the three-month average (+119,000) was respectable, but not especially strong. Prior to seasonal adjustment, private-sector payrolls advanced by 863,000, up by 3.358 million since February. That looks like the kind of (unadjusted) job gains we would see in a normal year, but the pace has been disappointing given the depth of the decline over the last two years.
The unemployment rate fell to 9.5% in June, but the details suggest no significant improvement. The decline was due largely to a drop in labor force participation, which could be a consequence of unemployment insurance benefits running out for some individuals. The employment/population ratio avoids month-to-month peculiarities in labor force participation – it fell further in June (to 58.5%, vs. 58.7% in May, 59.4% a year ago, and around 64% in the late 1990s).
The June jobs report confirms what was widely expected at the start of the year. That is, economic growth was expected to be positive, transitioning to a more sustainable recovery (one supported by an underlying expansion in consumer spending and business fixed investment rather that federal fiscal stimulus and a shift in inventories), but unlikely to be strong enough to push the unemployment rate down by much.
The list of near-term economic headwinds is long: lingering problems in residential and commercial real estate; tight credit, especially for small firms (and some reluctance of creditworthy borrowers to take on debt); the contractionary consequences of tighter state and local budgets; the federal fiscal stimulus ramping down into 2010; the Bush tax cuts expiring at the end of this year; and tighter budgets overseas limiting global growth. On the positive side, long-term interest rates are extremely low, which should provide some support. Thirty-year home mortgage rates hit another record low last week.
One worry is that if the recovery should falter, monetary and fiscal policy may be helpless to counter that. The Fed already has short-term interest rates near 0% – conventional monetary policy is played out. The Fed could resurrect quantitative easing (buying mortgage-backed securities and long-term Treasuries), but what would be the point? Long-term interest rates are already low. There’s clearly scope for more fiscal stimulus, but the public mood is against it and it would be nearly impossible to get anything significant through Congress. The desire to reduce the budget deficit is well-intentioned, but misguided in the short term. As a consequence, the economic recovery may be painfully slow in the quarters (perhaps years) ahead.
The Gulf oil spill had a clear impact on consumer confidence numbers in June and may dampen consumer spending growth in the near term. If households increase savings significantly (which might happen after a drop in the stock market), overall growth will be even softer. Businesses generally remain fearful of what the Obama Administration might do, but Obama has already had difficulties getting things through Congress (healthcare and financial reforms were significantly watered down). The November elections won’t change that outlook, but it could alter perceptions. Normally, gridlock is good for the markets, but there are times when stuff has to get done.
Copyright (c) Raymond James Equity Research
