We do want to temper any great concern at this point with the reminder that these numbers are lagging by nature, and that some softness was expected due to the unusually warm previous months that likely saw some job additions pulled forward. Also, perhaps somewhat counter intuitively, first quarter productivity falling by 0.5% on an annualized basis could portend good things for job additions as it appears that companies may be largely unable to squeeze any more out of current workers, and may be forced to hire in order to meet even modestly increasing demand. Helping to support that potential demand is a modest improvement in credit availability from banks, pushing more consumer spending. Note in the below chart that it's a year-over-year percent change therefore even though the line for willingness has moved lower-it still indicates and increasing willingness over last year to make consumer loans.
Easing standards could help support demand
Source: FactSet, Federal Reserve, U.S. Conference Board. As of May 7, 2012.
Hope for more Fed action?
We continue to be somewhat surprised that many market participants appear to be hoping for another round of quantitative easing by the Federal Reserve. First, we believe that data would have to get substantially worse than the relatively neutral picture weāre currently seeing, not a great development. And second, we are highly skeptical of the actual effectiveness of QE2. There continues to be enormous amounts of money in the economy that remains sidelined. Getting that money to work is the key, not adding more liquidity to the already existing massive pile.
Down the street in Washington, however, we are much more concerned about the potential for a big hit to the economy due to the so-called "fiscal cliff." This is scheduled to occur at the end of the year and presently represents approximately $410 billion in tax increases and roughly $120 billion in spending cuts, which would represent about 3.5% of US gross domestic product (GDP) according to Strategas Research Partners. The market appears to be hoping that Congress and the President will come together in a lame duck session following the November elections to forestall at least a portion of the scheduled actions. We remain concerned about their ability to get anything substantial done and believe this is one of the biggest current risks to our relatively optimistic outlook. This concern was reinforced by Federal Reserve Chairman Bernanke recently saying that, "The size of the fiscal cliff is such that there's no chance the Fed could have any ability whatsoever to offset that effect on the economy."
Growth needs to accompany austerity in Europe
Falling off a cliff doesn't begin to describe the ongoing problems in Europe and recent events have demonstrated the unpopularity of austerity. The adjustment to living within your means requires difficult choices and takes timeāthere is no magic cure.
