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Lynn Reaser, is chief economist at the Fermanian Business & Economics
Institute in San Diego and past president of the National Association for Business Economics. Previously she was chief economist of Bank of America's Investment Strategies Group.

Harlan Levy: How good, really, are February's job numbers - 236,000 new jobs overall, with 246,000 in the private sector and a 10,000 loss in government?

Lynn Reaser: It was a very good report. The employment situation has improved significantly. We saw widespread job gains in the private sector, higher wages, and increased hours worked during the week. The unemployment rate also moved lower, Part of the decline was due to discouraged workers dropping out of the workforce, but the larger part of the improvement reflected a gain in jobs. The government sector continued to reflect the impact of budget problems, particularly at the state and local levels, but the loss was not dramatic. Still, losses could increase going forward at the federal level.

H.L.: Don't government job losses become a dead weight on the economy?

L.R.: The government sector will be a restraint but will be offset by gains in the private sector. In addition, while the federal government could experience cutbacks, revenues are improving significantly at the state and local levels, which could cause those payrolls to stabilize as we move through the year.

H.L.: Do you see a continuation of over 200,000 new jobs a month?

L.R.: It is probably going to be difficult to see that strength repeated until the latter part of 2013 and 2014. Some of the uncertainty about the budget could dampen hiring in the near term. By the latter part of 2013 the government will have been forced to develop a budget and perhaps even a long-term deficit reduction plan,
which would give greater certainty to the fiscal environment. In addition, the housing market is continuing to gain momentum, and consumer spending should show gradual strengthening as at least modest job gains continue.

H.L.: When the good job news hit the market, stocks soared. Then they slumped when the Federal Reserve indicated it might cut back on its quantitative easing. How much is the Fed in control of stocks?

L.R.: The Fed does have a significant influence on the market. Its quantitative easing measures, which supply large amounts of liquidity to the market, have helped push stocks higher. The Fed is unlikely to stop those purchases until more concrete evidence of sustained improvement in the job market is clear. But stocks are also affected by the underlying growth in corporate profits, which should continue to improve as the economy strengthens. Given the alternatives available to investors, stocks appear to be a favored investment class.
Meanwhile, at this point, bonds are vulnerable to any sign that the Fed may take the first step toward reducing its accommodative stance down the road.

H.L.: What's your prediction for the economy this year and next year?

L.R.: The economy should show Gross Domestic Product growth this year of about 2.5 percent. In 2014 growth could be higher - 3 percent. This will reflect a further strengthening of household balance sheets, an improvement in the job market, improvement in the global economy, and more capital spending by businesses.

H.L.: You and other members of the National Association for Business Economics just came back from a visit to Washington D.C. for your annual policy conference. What did you learn?

L.R.: We heard from leading economists, Federal Reserve officials, and government policy makers on the economic outlook and various policy issues. Fed Vice Chairman Janet Yellin indicated that the Fed is continuing to focus on supporting better economic growth and achieving a stronger job market. Alan Krueger, chairman of the presidents Council of Economic Advisors indicated that the president is committed to reaching an agreement with Congressional leaders to achieve deficit reduction over the next 10 years but that any such plan should include a reduction in tax loopholes for the wealthy along with spending cuts on entitlement and other government programs.

Congressional Budget Office Director Doug Elmendorf concluded his presentation on the budget challenge indicating that the middle class will ultimately be forced to bear some of the burden. The individuals who spoke on the housing market were very bullish, while some of the commentators on the euro zone were quite guarded in terms of the risk that still overhangs that 17-nation block. So the bright spot continues to be the rebound in housing. Overall, we still have enormous policy challenges, first resolving the U.S. fiscal situation, second, determining the exit strategy and implications for the Fed's exit from a very easy accommodative monetary stance, and third, challenges still facing various countries in the euro zone and their policy leaders. I have mixed views with a keen awareness of the policy challenges and a hope that we can find solutions, which are certainly achievable if we have the political will. With the different mileposts for the fiscal cliff there must be a political solution, because the alternative is a market solution, which could be quite painful. The markets ultimately could force discipline on the U.S. with significantly higher interest rates, a sharp drop in the value of the dollar, or a combination of both, and those factors could in turn punish the stock market. But the urgency of finding a solution would certainly be enhanced.

H.L.: Is the U.S. a nation in decline because of a lack of leadership and the huge divide between the two polarized sides in Congress?

L.R.: I do not believe the U.S. is a nation in decline. We still have a huge future in technology. We have a free and competitive market, and we still have the entrepreneurial spirit alive throughout the country. The political discord is inherent as part of our democratic system. We just need leaders who are able to compromise, and hopefully we will see the public pressure on those leaders help move them in that direction.

Source: Interview With Lynn Reaser: 3% Growth, Over 200,000 Jobs Per Month In 2014