According to Friday’s Nonfarm Payrolls Report, the U.S. economy added no, nil, nada, zero jobs in the month of August. Nonfarm Payrolls data for July and June were revised lower by a combined 56,000 jobs. Although it is true that the strike at Verizon (VZ) contributed to the majority of the 48,000 jobs lost in the information sector, adding back each and every lost communications job would have resulted in a print of 48,000 new jobs. Pundits should stop trying to spin the economic data.
The truth is that the economy, which had only gained limited traction since the recession ended two years ago, is sputtering. Politicians, pundits and the American people should stop looking to the Fed for solutions. The Fed has done almost all it can do. QE3 will be like pushing on a string.
The best it can do is to “twist” and move its bond holdings farther out on the yield curve (10-year or so) to have a direct effect on driving down mortgage rates. The Fed can also set inflation, growth and employment targets to instill confidence among capital market participants. All of this is well and good, but these are cyclical tools to remedy cyclical problems. The troubles facing the U.S. economy are of a structural nature.
The problems facing the US economy are:
- Too many homes and too few qualified buyers. Not all of it is due to exceptionally tight lending standards. There are far too many homes even if banks adhered to any kind of prudent lending standard.
- US Households are over-leveraged. Just as a person must work through a hangover after a long weekend of partying and alcoholic imbibing, US households must endure a period of pain as they correct imbalances on their personal balances sheets. The idea of curing too much debt by having consumers incur more debt is nonsensical and irresponsible.
- The US offers businesses very few comparative advantages versus their global competitors. The US has the second highest corporate tax in the free world. On economically-stagnant Japan has a higher corporate tax rate. US businesses are reluctant to repatriate dollars earned overseas. Instead money is held, spent and invested overseas. Production occurs close to local customers as well. The actions taken by the National Labor Relations Board attempting to block Boeing from opening a factory in low-tax, non-union South Carolina demonstrates how anti-business or current crop of policymakers really are.
This is not about political ideology or social justice, it is about a malfunctioning alleged market economy that has been hamstrung for far too long by nonsensical, albeit well-intentioned, government policies the negative effects of which have been offset by Fed policy since the early 1990s. The Fed can do no more. It is time for policymakers to hold their collective noses and eat the cauliflower that are economically-friendly policies to get the growth engine running.
Bond investors may have read articles this week, one from Bloomberg News and one in the Wall Street Journal, which espoused the opinion that the bond market held a positive outlook for the economy because the yield curve (between its short-term and long-term benchmarks, the two-year and 10-year treasury notes was positively-sloped by a fairly sleep 200 or so basis points). The articles each stated, correctly, that the US economy has never fallen into recession when the yield curve was positively sloped and that the curve flattens or inverts before that happened.
At the risk of insulting the intelligence of the two respective authors, are they kidding? The Fed has the Fed Funds rate at effectively zero. Since Fed monetary policy rules the short end of the yield curve, the two year note is anchored below 20 basis points. However, the 10-year is beyond the Fed’s influence. Ten-year yields respond to growth and inflation expectations.
A 10-year treasury yield in the low 2.00% area reflects very poor growth. We could see it dip below 2.00% and remain there for an extended period of time if and when the Fed begins reallocating its holdings farther on the curve. However, because of extremely low short-term rates, the yield curve cannot go flat or invert.
The yield curve is about the journey, not the destination, especially in this environment. The fact that, prior to today, the curve between two-years and 10-years had flattened by approximately 70 basis points since the end of June is a more accurate indicator of the bond market’s sentiments regarding the US economy.
The September 20th – 21st FOMC meeting should be interesting. Following today’s employment data we are likely to see one hawk, Minnesota Fed President Narayana Kocherlakota, defect to the doves. However, I do not believe we will see a full blown QE3. The Fed is more likely to set targets (jawboning), either hard or soft, and announce that it is going to perform extension swaps farther out on the yield curve.
With commodity inflation already elevated and blamed for much of the slowdown in consumer demand and for hampering job creation, aggressive easing could be death for the US economy with the holidays and winter’s cold just months away.
I would wish everyone a happy labor day, but these are not very happy times for labor in the U.S.