Disappointing, but Not Terrible
Advisors Capital Management
By Charles Lieberman
July 9, 2012
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.
(c) Advisors Capital Management
