Friday, July 5, 2013

Nothing new on the jobs front, but some optimism is warranted

This post comes late in the day, because this morning I attended the birth of my fifth grandchild and first granddaughter (mother and child both doing great). It marked the 8th time that I have been a part of the delivery of my children and their children—all great moments that I will treasure. 

It's a short post, because the jobs report was quite unremarkable.


Although the gain in jobs was above expectations, the trend has not changed at all. Private sector jobs have been growing at about a 2% annual pace for almost three years—sometimes a little faster, sometimes a little slower. It's the same pace as we saw in the mid-2000s.

It should be a lot stronger given the depths of the last recession, but it's not, and for a variety of reasons. The market has worried for almost two years that the economy would suffer a "double-dip" recession, but it's just not happening. The economy has managed to grow despite awful fiscal policy: way too much spending, which squanders the economy's scarce resources; way too much in the way of transfer payments, which create perverse incentives; a huge increase in regulatory burdens and uncertainty, which saps business confidence and chills investment; and more recently higher marginal tax rates, which reduce the incentives to work and invest. 

The economy has managed to keep growing this year despite the expiration of the payroll tax cut and higher marginal rates on upper income earners. It's managed to growth despite two years of recession in the Eurozone, and a slowdown in the growth of the Chinese economy. And it's managed to grow despite the enormous monetary uncertainty created by the Fed's unprecedented Quantitative Easing.



It's been a disappointing recovery, and a reluctant recovery, but it has nevertheless been a recovery, and it shows every sign of continuing at a modest/moderate pace. The private sector has managed to create about 7 million new jobs in the past three and a half years. The public sector, meanwhile, has lost about 750,000 jobs, and job losses there appear to be coming to an end. The economy is getting back on its feet, slowly but surely, but it could use some help. 

There are new reasons to be optimistic about the future. Regulatory burdens may ease now that Obamacare has effectively been put on hold for the next 18 months (see my earlier post on this subject), and the odds are rising that it might even be repealed. If we get lucky, Congress may replace Obamacare with more sensible reform, and that could prove to be a huge boon to the economy. It's doubtful we'll see any further rise in tax rates, thanks to the huge improvement in the fiscal outlook; tax uncertainty has been reduced significantly. Finally, the outlook for monetary policy is improving, as evidenced by the recent sharp rise in interest rates. Higher rates are a sign that the market is becoming less pessimistic about the economy, while at the same time gearing up for the tapering of Fed bond purchases and the inevitable moment when the Fed starts raising short-term interest rates.

In the absence of recession, and with prospects for improvement in fiscal and monetary policy, risk assets continue to look attractive, with the notable exception of gold, which is suffering because the outlook for the economy and monetary policy is improving.

16 comments:

Joseph Constable said...

Congratulations grandpa!
I am less optimistic about the next year or so in economy, but 2014 should catch up if not exceed the peak employment of 2007.

Nothing could generate more optimism than the repeal of Obamacare. It ain’t going to happen. It would be too embarrassing. They could only replace it with a single payer system which would be a disaster.

We have to solve the problem of the high cost of health care due to the crony-capitalist-government health care cartel. And due to the shifting of cost onto others.

Benjamin said...

. And it's managed to grow despite the enormous monetary uncertainty created by the Fed's unprecedented Quantitative Easing.--Scott Grannis.

The uncertainty is caused the Fed's refusal to explain QE in terms of economic goals, not mechanisms.

That is, "We will do $100 billion a month in QE, and we will not taper down until we see inflation over 2.5 percent, or employment levels back to 2008 highs. We will taper up if economic growth falters."

The market is uncertain, as the Fed---and several loose cannons on the FOMC deck---are ever bewailing QE and talking about cutting QE,

No wonder the market is uncertain!

John Taylor, Stanford economist and right-winger, gushed about the positive effects of QE in Japan 2001-6. That QE program coincided with Japan's longest postwar expansion, and resulted in very little inflation.

Okay, so in principle, Taylor loved QE. Did not think it was destructive or caused uncertainty.

Taylor says he is opposed to QE in the USA now, but that is a matter of timing or circumstance, not principle. In principle, he thinks QE is great tool at times.

For the life of me, I cannot see much difference between Japan in 1990s and the USA now. Very low inflation, threats of deflation, and weak economic growth.

Bernanke should be talking about "tapering up" if the recovery doesn't get some steam.







William McKibbin said...

Actually, the US employment to population ratio posted a two year gain, which does suggest a trend -- what we see today is what the rest of the 21st century will look like -- most of the job increases were in retail and healthcare aids, where wages remain food stamp eligible unfortunately -- more at:

http://wjmc.blogspot.com/2013/07/us-employment-to-population-ratio-shows.html

John said...

Congratulations to you and your wife on the birth of your grandchild. And very best wishes for the proud parents.

William said...

The Wall Street Journal and others have reported that $60 to 80 Billion were withdrawn from bond funds in June 2013. Bill Gross's PIMCO Total Return Fund had $10 Billion outflow. According to Morningstar, the SEC 30 days yield on his flagship fund is now 1.84% and the year to date return is a negative 4.24% or 2.3 times the annual yield. Vanguard's Long-Term Bond Index Fund with a yield of 4.33% is down 9.33% as of Friday.

Meanwhile the LIPPER FUND FLOW REPORT for this week showed:

Monthly for May
Equity Fund Inflows $28.7 Bil;
Taxable Bond Fund Inflows $10.3 Bil

xETFs - Equity Fund Inflows $10.8 Bil;
Taxable Bond Fund Inflows $6.1 Bil

And after a few eeks of withdrawls:

Weekly 07/03/2013

Equity Fund Inflows $4.7 Bil;

Taxable Bond Fund Inflows $3.3 Bil

xETFs - Equity Fund Inflows $3 Bil;

Taxable Bond Fund Outflows -$609 Mil

Hans said...

I am glad the author is so optimistic about the future...

http://www.aei-ideas.org/2013/05/red-tape-facts-regulatory-costs-are-now-the-second-largest-item-in-a-typical-familys-budget/

Hans said...

Let this be known to all, as I too was brought out of the darkest...

I and many others have long stated, that this economy is not well, in fact, it is still rather quite sick...

I have termed it as "The Great Phony Recovery"...

Read the following and you will understand why there is no growth, let alone a recovery and why the great minds of our collective times have badly missed the facts.

http://www.telegraph.co.uk/finance/comment/liamhalligan/10093500/Lack-of-genuine-reform-is-sowing-seeds-of-next-crisis.html

Of course, I could not make the connection (cause & effect) but I knew that without such large deficient spending our economy would not be in the black...

In fact, if this article can not be refuted, then the last two years have been a statistical fraud, conducted and approved by varies governmental units and their operatives (shills)...

This also suggests, as Ben Jamin has stated, that the campaign of the Central Bank (and others) to improve the economy has failed on a epic proportion..

Of course this will be all explained away with the "we avoided a depression" and "returned the country to a sound and fundamental growth"....

The incompetence and corruption coming from the Beltway can no longer be ignored, unless you are beneficiary or have your head-in-the-sand...

Scott Grannis said...

Hans: the author of the article you link to is ignorant of how government debt and GDP work, and ignorant of how the Fed functions. When Treasury sells debt to finance federal spending, it does not create GDP. It simply transfers money from the person who bought the bonds to the government. The government spends more, but the private sector spends less. Also, QE has not created massive amounts of money out of thin air. QE has created bank reserves, but those always reside at the Fed: they are not money that can be spent.

sgt.red.blue.red said...

Scott, the educator. I always like your even-handedness when explaining/clarifying positions on the comments section of your blog.

Benjamin said...

Yes, excess reserves are kept at the Fed, but baks can increase lending if they so choose.

Also, right now the Fed pays 0.25 percent interest on the excess reserves. It should halt that, to boost the incentive for banks to lend out. But our central bank is more attuned to the needs of banks than the need of the macroeconomy...

Also, when the Fed buys US Treasuries, it is deleveraging taxpayers...

I do not like the Fed buying MBS, and that strikes me as a bad idea, easily politicized....

adam smith said...

Its a nice post.The author is very optimistic about future.Always stay positive.






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NormanB said...

Since the bottom of employment (Feb-2010) the rate of growth is a measly 1.5% per year. The 12 month 2% isn't making up for the big decline much. I'll use the 1.5% as my growth number. It ain't good.

djakel said...

Nothing new on the jobs front, eh?

Virtually all of the job gains in the past year are part-time. Assuming the average part-timer works 20 hours a week, then the true full time equivalent job growth has been only 1/2 of the reported numbers.

Here is an excerpt from a pbs.org blog post supporting this claim:

"U-6 includes all of these people. What happened to it in June? It rose -- dramatically: from 13.8 percent to 14.3 percent. That's mainly because those working part-time "for economic reasons" -- i.e., through no fault of their own -- skyrocketed by more than 300,000, even after the seasonal adjustment. (Unadjusted, the raw data show an increase of more than 800,000.)

The total? More than 8 million Americans who were working part-time, even though they say they want a full-time job -- in addition, remember, to the 12 million officially unemployed. And if you count all part-time workers in America -- those who worked between one and 34 hours in the past week -- the total is now up above 27 million, several hundred thousand more than it was a year ago.

full article: http://www.pbs.org/newshour/rundown/2013/07/boffo-bls-jobs-data-but----the-new-jobs-are-only-part-time.html

Scott Grannis said...

I would caution against reading a whole lot into monthly employment stats. Yes, the number of people working part time for economic reasons is up this year, but it is nevertheless almost 1 million less than it was three years ago. If anything, the trend in such part time employment is slightly down.

Relative other recoveries, however, the number of part time workers remains stubbornly high. As I say in my post, I think the underlying problem is, among other things, Obamacare. Businesses are reluctant to hire, and especially reluctant to hire full-time workers.

William McKibbin said...

The real problem with the US economy is increasingly obvious -- the US trade deficit is totally out of control -- more at:

http://wjmc.blogspot.com/2013/07/us-trade-deficit-out-of-control.html

Hans said...

Thank you for your reply, Mr Grannis..

Please, anyone whom wishes to enter the debate, do so...

Allow me to defend the statements made by the author...

"When Treasury sells debt to finance federal spending, it does not create GDP. It simply transfers money from the person who bought the bonds to the government. The government spends more, but the private sector spends less."

You are correct, Mr Grannis, that in itself the selling of bonds does not add to the GNP; however, when the money is spent by the Central government, it is figured into the GNP..

Furthermore, in my opinion, the economy is not a net zero game, as there can certainly be growth in both the government and private section simultaneously..

"Also, QE has not created massive amounts of money out of thin air. QE has created bank reserves, but those always reside at the Fed: they are not money that can be spent."

What asset does the Federal Reserve use to purchase debt? By what means does this entity use to generate income in order to purchase bonds and MBS ?

I am in the dark, so I hope someone, anyone has an answer!

BTW, Ben Jamin, excellent reply of which I whole hardheartedly agree.

It is my contention, that governmental units do not add to the economy, but rather are only transfer agents (Western Union) and not good ones at that..Just think about being robbed and the thief spending your dollars, does it add to the economy ?

Henceforth, the sector adds no wealth into the general economy, but rather results in reduced growth and income as a result of it's perpetual meddling..