Disappointing, but Not Terrible
07/09/12
by Charles Lieberman, Advisors Asset Management
Job growth has slowed to a disappointing pace over the past three months, insufficient to bring down unemployment, but not so weak that recession is much of a threat. This mediocre performance also leaves the Fed in a quandary, neither making an obvious case to leave policy unchanged or a clear case to implement yet another form of policy accommodation.The economy added 80,000 net workers, the third consecutive month in which hiring remained so sluggish, following a first quarter in which hiring averaged 226,000 monthly. But other details in the report were more encouraging. The workweek rose by 0.1 hours, a seemingly small number, but equivalent to roughly 385,000 full time jobs. Hiring of temporary workers also advanced by 25,000, an important precursor to permanent hiring. A solid 0.3% increase was also reported for wage rates, which is important to finance household spending. With the housing sector beginning to gain some momentum, providing a new source of demand to support growth, a relapse into recession appears highly unlikely. So, the employment report was far from a disaster, but that’s hardly a ringing endorsement.
Fed officials are surely going to have quite a debate over the future direction for policy. Public statements suggests that they are quite divided over whether to implement more innovative initiatives to promote growth, although a number of them worry that reversing all of their efforts at the appropriate time may become more difficult. Certainly one possible new initiative may be to buy mortgage backed securities instead of U.S. Treasuries bonds. This would make reversing the Fed’s accommodative policies easier, since mortgage pay down principal every month. There is also concern that the Fed is running out of policy options. It is commonly accepted that the efficacy of policy is diminishing, although there is quite a bit of disagreement whether further initiatives would be worthwhile.
It is highly unlikely that any new fiscal policy initiatives can make it through Congress prior to the election, which is now less than four months away. So, the onus for any additional initiatives falls exclusively on the Fed. Even if there is no new policy implemented at the Fed’s upcoming meeting, it is likely they would feel obligated to do something if hiring remains disappointing. They may choose to act now to avoid complaints that they are acting out of political considerations as we get closer to the election.
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