Crisis Averted, A Re-focusing On Prior Worries
Raymond James
By Scott J. Brown
August 8, 2011
Lawmakers approved a debt plan, raising the debt ceiling and averting a self-inflicted financial catastrophe. For the stock market, celebration was brief as attention returned to the subpar U.S. economic recovery and the European debt crisis. The July Employment Report was better than anticipated, but far from strong. Fed policymakers are unlikely to undertake another round of asset purchases this week.
As with most of the recent economic data reports, the July Employment Report was consistent with a subpar rate of growth, but not a recession. Private-sector payrolls advanced at a faster rate, although the recent trend has been somewhat below a sustainable pace (that is, enough to generate a reduction in the unemployment rate. The unemployment rate did edge down in July, but that was only because labor force participation decreased. In fact, the decrease in the unemployment since the end of 2009 is largely an illusion. The employment-population ratio has been trending flat.
That means that we are making no progress in reducing the slack in the labor market. Officially, there are 13.9 million people unemployed in the U.S. (6.2 million for half a year or more). In addition, there are about 6.6 million people not in the labor force who currently want a job and another 8.4 million who are working part-time for economic reasons. The unemployed are losing job skills and new entrants to the labor force are not acquiring the skills that they normally would. This is a national tragedy. High unemployment means that the economy is much weaker than it would be otherwise. The level of economic activity is more than 10% below its potential.
Voters are disgusted with our national leaders, who spent the last few months arguing like kids in a sandbox instead of actually doing something to boost job growth. The focus on the near-term budget deficits has been misguided. The real budget problems are long term in nature. Fortunately, the debt deal does not require large spending cuts up front. To do so would weaken the recovery. Austerity makes sense in the long run and nearly everyone agrees that we have to address the long-term budget trajectory. However, we’re already seeing the impact of austerity in the short run. State and local government payrolls have dropped by 580,000 since the end of 2008, while federal employment (ex-census workers) is up just 53,000.
Austerity is also a major issue on the other side of the Atlantic. Europe’s debt crisis has grown more worrisome. From the beginning, the major threat was that problems in Greece, Ireland, and Portugal would spread to Spain and Italy. These are large economies (Italy is the eight largest economy in the world). Debt problems vary from country to country, but the common thread is that these governments have promised benefits that will be hard to deliver. Spending cuts and increases in taxes would seem to be necessary to put long-term budget outlooks in order. However, austerity also means that growth will be weaker, countering efforts to trim deficits.
Fiscal policy in the U.S. and abroad is going the wrong way, weakening the prospects for global growth. What about monetary policy? In the U.S., Fed policymakers meet this week. As Chairman Bernanke testified in mid-July,“even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further.” The Fed could provide more explicit guidance on how long short-term interest rate would remain low and how long the balance sheet would be maintained at its current elevated level. The Fed could lower the interest rate it pays on bank deposits held at the Fed. It could increase asset purchases or shift to longer maturities. However, these moves would be predicated on a reemergence of deflationary risks, and we’re not quite there yet.
(c) Raymond James
