A dicey jobs print for the Fed

The US economy was still generating jobs in September, although the rate of job creation remains moderate. That said, the unemployment rate continues to fall and at 7.2 per cent, is at its lowest level since November 2008.

The release this morning of the delayed non-farm payroll and labour force data confirmed an increase of a net 148,000 in employment in September, which brings the total increase in employment since the recessionary low in February 2010 to 6.97 million. While this employment rebound is hugely encouraging, the level of employment is still around 1.77 million below the pre-crisis peak. It is easy to see why the US Federal Reserve still has super stimulatory monetary policy in place and why it has been reluctant to start a monetary policy tightening cycle.

There simply needs to be a further period of solid economic growth to absorb the increase in population, but also to regain and exceed the level of employment from five years ago. 

The current zero interest rate structure with $US1 trillion a year of bond buying from the Federal Reserve is clearly yielding some growth and job rewards, but there is still a lot of ground to be made up before the US economy is anywhere near full employment, especially in light of the news this morning.

The other information within the data was reasonably positive. The average hourly work week was steady at 34.5 hours, wages edged up by 2.1 per cent over the year and the participation rate was steady at 62.2 per cent, albeit after some quite dramatic falls over the recent years.

The market reaction was no surprise. Stocks rose and bond yields fell reflecting a view that there would be ongoing policy stimulus in the months ahead. Both the Dow and S&P 500 scaled new record highs while the fragile US dollar took a further hit, with the Australian dollar above 97 US cents and the Euro hitting 1.38.

The trend of a weaker US dollar seems assured, not just for fundamental economic reasons, but also because of global investor repricing of US sovereign risk in the wake of the political impasse over the budget and debt ceiling. 

This market confidence may be temporary or at least subject to greater volatility if the political shenanigans rekindle in the months ahead. Further, the data flow is likely to be problematic for the next few months as was discussed earlier this week (A measuring stick for the shutdown’s shock, October 21). 

While the labour market data for September were soft but not disastrous, the problem is that they pre-date the political upheavals which shut the government down for more than two weeks this month and eroded confidence in the business sector. Clear and unpolluted data on that front will not be available for at least a further two months.

Until then, markets and the policy makers at the Federal Reserve will no doubt welcome the news on improving labour market conditions but will really need to see a couple more months of information before being confident enough to get set for the start of a monetary policy tightening cycle.

Over the longer run, the US needs monthly job creation of close to 200,000 for a couple of years for the unemployment rate to break decisively towards 6.5 per cent and confirm an end to quantitative easing. This is what the Fed and the Obama administration would be hoping for into 2015.

Easy monetary policy, a weaker US dollar and the probability of some positive impetus from a stronger global economy will all support the growth outlook for the US.

Working against a speedier growth cycle is contrationary fiscal policy, which has seen an unprecedented fiscal consolidation of the last three years. Spending cuts are undermining economic growth and therefore job creation and this tight fiscal stance appears to be in place for the next couple of years.

In the end, the key point for the US is that jobs are being created, the unemployment rate is trending down and economic growth is steady. To be sure, it could be doing better but the recovery from the deepest and most complex economic collapse since the 1930s Great Depression, is to be welcomed, not least for the 7 million jobs created in the last three and a half years.