SCOREBOARD: Overrated jobs

Stocks rallied following strong US jobs figures, but that's unlikely to influence QE or tomorrow's Reserve Bank rates decision.

The big fear had been that the US sequester would cost many hundreds of thousands of jobs, and when we got the March payrolls those worst fears looked to be unfolding. There was that, or the oddly termed 'Spring swoon' or ‘Summer slowdown’, being marketed buy some (in reality the double dip lite, fear mongering in whatever form).

By now you know the March jobs numbers were revised up from their initial estimate of 88,000 to 138,000 and the April jobs numbers were 165,000 – stronger than the 150,000 estimated. These are strong numbers and follow an extraordinary increase of 332,000 in February.

The fact is, and as much as this seems to annoy people, US jobs growth is very strong. What I find bizarre isn’t that we have such strong jobs growth – it’s consistent with the strong recovery underway in private demand. What I find bizarre is that so many people are hostile to this idea, sincerely hostile to what is so obviously true and should be good news.

Despite what is clearly a substantial improvement in the labour market though, don’t go looking for the Fed to make significant changes to QE. This simply isn’t going to happen, as the program here is to monetise deficits, not simulate the economy.

The private sector has recovered and is actually doing very well. Strong jobs growth is the consequence. The unemployment rate at 7.5 per cent (down from 7.6 per cent) is still elevated relative to history, but this has got nothing to do with the lack of momentum in jobs creation. It is a remnant of the severe jobs destruction that occurred because of the Fed-induced global financial crisis.

Such is the current momentum, the private sector would still be doing very well in the absence of QE and with interest rates 200 bps higher (maybe not Wall Street banks, who are addicted to the free money). The private sector doesn’t need the distortions provided by QE, this excessive and unnecessary level of government interference in the operation of what should be a free market (it’s not just bonds, it's currencies, credit, ABS and in some cases around the globe, equities). And little good will come of it.

So the S&P500 was up 1 per cent and the Dax 2 per cent higher. Commodities fared well also, with copper up 6.5 per cent and crude 1.7 per cent higher. The Australian dollar was up 40 pips to 1.0307. 

Back home, the surge in payrolls is unlikely to influence the Reserve Bank board much, and reading the press today (on the Reserve Bank) it has featured more as an afterthought (the bank's board meeting decision comes at 1430 AEST on Tuesday).

The pressure again is on for them to cut, maybe not this meeting, with only a small minority actually expecting a cut. But everyone is forecasting another at some point, odds on for June. Certainly the government has stated they want still lower rates, in a pathetic attempt to lift their own election chances, safe in the knowledge that correcting rate hikes will occur after they lose the election.

The same old businesses want lower rates and the PR institutions they have also constantly call for lower rates. I’ve only heard one chief executive with any wisdom express what is obviously true – Mike Smith from ANZ, who noted that lower rates would do nothing for the economy. But these calls are drowned out by the cacophony of mindless, automaton economists and commentators, who are incapable of seeing the fallacies of their own arguments.

For a start, the economy doesn’t need lower rates. The idea that the economy is sluggish or sputtering is demonstrably untrue. Moreover, while people can forecast what they want, and they have, they’ve been making these forecasts for years and have been wrong – for many years.

The undeniable truth, as acknowledged even by the Reserve Bank, is that growth is around trend. It was around trend when the cash rate was 100 bps higher. Jobs growth is a little below, the unemployment rate is low and inflation, underlying inflation (accounting for the volatility of the series) is at the mid-point of the target. Non-tradable inflation hasn’t come down at all and is travelling past 4 per cent. Bring the dollar down, all ye whingers, and see what happens. But now some say, Oopsy – the strong dollar isn’t even helping to contain inflation! Sydney just over the weekend had the best auction result for three years, house prices are on the rise etc. Yet there are those who still argue for lower rates based on some fairly flimsy arguments.

Let’s assume for one moment that the economy is weak, that the lies spread constantly by lacklustre commentators and economists are true (where is your evidence that the overall economy is weak? Where is your proof?). Even if we assume that, then with record low rates already, the case for still lower rates is the weakest I have seen. For what would lower rates do now that already record low rates haven’t?

Yet the mindless automatons don’t for one second stop to think why record low rates aren’t working, and the truth is they haven’t really worked to bring growth above trend. In fact the economy isn’t noticeably different from when the easing cycle commenced.

Why? Because the price of money was never a problem. The problem is confidence. Mike Smith is one of a very small minority of people who realise this. It is a part of the reason why some sectors haven’t responded as much as they would have usually to lower rates yet. But, as I have documented before, lower rates haven’t lifted confidence. They are working against it. Still lower, the automatons say! Lags, they say. Wags, I say.

All the Reserve Bank has accomplished is to whittle away valuable policy ammunition in the case of something serious actually occurring. What if calls that the mining boom will soon end are right? Fiscal policy is all we have left, and even here, our position is nowhere near as good as it should be given the incompetence of the government and the incessant talk of recession or sluggish growth by commentators.

Fact is, we should be in surplus already – that shouldn't have been difficult to achieve with growth at trend. This is yet another major consequence of the poor forecasting track record of domestic economists. As a result of it, no pressure was applied to the government, few called out their lies. Too many were talking about how tight fiscal policy was when, as we now know, it wasn’t. 

Poor quality economic analysis does have consequences and we’ve seen that. It’s terribly unfortunate because we could have otherwise been proud of strong growth, modest surpluses and falling debt. Instead, we shamefully whinged it all away.

Have a good week.

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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