Just when it you thought it was safe to believe that the economy was gaining some steam, Friday's data poured water on the fire. Nonfarm payrolls came in with a disappointing 39,000 new jobs in the month of November. Even when one considers the upward revision of 21,000 jobs for the October that only equals a total of 60,000 new jobs. The two-month average of approximately 105,000 new jobs per month, roughly half the number of jobs needed to lower the unemployment rate.
The private payrolls data, considered to be a better measure of unemployment recovery, due to the importance of the private sector in the U.S. economy, was also disappointing reporting only 50,000 new jobs with an upward revision of 1,000 additional jobs to the October data. This is quite a disappointment given last Wednesday’s better-than-expected ADP employment data.
Not surprisingly the markets initially reacted negatively to the data then recovered significantly. The reason for the recovery was said to be the belief that payrolls data for November may be a negative outlier. Supporters of this theory point to the strong ADP number. I cry foul on this. Why do I cry foul? The ADP report (a measure of private payrolls) has undershot the private payrolls component of the establishment survey. Critics have pointed to this and decried the ADP report as being unreliable as it underestimates the employment recovery. Not with the ADP report overshooting Friday’s private sector data, it is ADP which is being called accurate and the establishment data is now deemed to be unreflective of the job market recovery.
Beware of pundits, market participants and strategists who cherry-pick data for their own needs. Economists put far more value in the nonfarm payrolls data and its private sector component for a reason. It is more broad-based and tells a more complete and accurate story. Blind market bulls cannot have it both ways,
As if the nonfarm payrolls report wasn’t depressing enough, the unemployment rate report offered no comfort. The unemployment rate rose to 9.8% from 9.6%. Often during an economic recovery the unemployment rates will trend higher as discouraged displaced workers become more optimistic and answer the so-called household survey that they are now looking for work. However, that was not the case this time around. The unemployment rate rose due to more Americans being laid off.
I don’t often find much valuable commentary on CNBC. I believe that CNBC really stands for Constantly Naively Bullish Channel. However, on Friday, one guest speaker (whose name I did not hear) made a poignant observation. He stated that maybe the impact of technology on productivity is being underestimated and the impetus for large-scale hiring just isn’t there, in spite of the pick up in economic activity. I have heard that before, but I can’t remember where. ;)
Friday’s soft jobs data should not come as a complete surprise. Fed Chairman Bernanke has been warning that the economic recovery is sluggish and job growth is impaired. This is why the Fed engaged in QE2 and could very well leave the Fed Funds rate unchanged well into 2012.
Fed policy is causing some inflation concerns. This is not surprising as the Fed as acknowledged it is trying to accomplish just that. However, the benchmark from which to gauge the bond market’s inflation concerns has changed. For almost a decade, the 10-year treasury note was the long-term benchmark for inflation concerns. This was because of the suspension of 30-year government bond issuance in 2001 and because a comparatively small float (amount issued) compared with the 10-year since 30-year auctions resumed a few years ago. Now with Fed making about 1/5th of its purchases in the 10-year area, the 10-year yield, although higher recently, is probably too low to accurately reflect inflation concerns. The long bond has regained its status as the long-term inflation benchmark.
What does the long bond yield tell me? That inflation pressures may increase, but there is no need to buy a wheel barrow to haul grocery money to the store. Sure, we could see 5.00% by 2012, but I doubt we will see inflation strong enough to push long-term rates much higher, not unless we can create another bubble.
There is a debate as to what is and isn’t inflation. There is a stupid YouTube video circulating explaining QE2 and why it makes not sense. The video appears to have been made by an intellectually-challenged NPR intern using a kiddy V-Tech computer. The video asks why the Fed does not see inflation when food, energy, healthcare and tuition costs are higher.
Obviously this gadfly does not understand demand curves and taxes on consumption from price increases in sectors which have inelastic demand curves. He or she also does not understand that producers cannot pass price increases through to consumers. I don’t know about you, but I am paying less for clothing, vehicles, electronics and various other goods and services.
The area experiencing severe deflation is housing. Not only is the Fed largely responsible for the small amount of inflation pressures we are experiencing, but it is the only thing standing in the way of a collapse in housing prices.
I am not defending the Fed. I am only explaining why it is concerned with deflation and why it has engaged in QE2. If it were up to me I would let home prices reset to levels at which people could afford to purchase them. There are many people who cannot obtain a mortgage for a $500,000 home, but could for a $300,000 home. However, letting prices reset would not only blow up many influential investors in mortgage securities, it could impair the banks, including some large banks. The Fed does not want FC2 (Financial Crisis 2). QE2 is much more palatable. However, it will extend the time needed to turn the economy around, not until the glut of available homes is absorbed by the market will the economy recover.
Disclosure: No positions