It is strange how people react to data and news in this recovery. I have long been a critic of this concentration on or obsession with pessimism. The seeming broad constituency for pessimism in this recovery remains one of its defining features. Even with all the social safety net programs and regulatory backing and government safety-nets people act as though it is the Great (not-so-great) Depression revisited.
Democrats are pessimists because they want to blame the bad economy on Republicans ("we inherited this from you!"). Republicans have been a touch smarter, realizing that the president in office will be held responsible, no matter who is to blame. In truth, there are deep antecedents for what went wrong. It was a true bipartisan failure. But that led to the only bipartisan thing anyone could agree to in this cycle: bipartisan finger-pointing.
So when we finally got a killer jobs report for January 2012, it left everyone speechless. I was sitting on the set at CNBC with two other economists and various CNBC anchors with their economic expert, Steve Lieseman, when the number came out. The first thing people began talking about was… Europe. Stunning.
In truth, Mark Zandi said there was nothing to talk about concerning the jobs report, since nothing was controversial -- and he was right. There was no back and forth or disagreement on the report. We all had stars in our eyes. The report was strong. The household survey was strong. The payroll metrics were strong. The labor force even grew, and still the unemployment rate fell again -- a prediction I think no one had -- this side of the planet Uranus, anyway.
The job market is beginning to take flight. It has had a delayed reaction to growth in each of the previous two recoveries. That phenomenon seems atypical, but it may just have shown us it is the new archetype. I wish I could explain why the jobs are having such a delayed reaction to growth, and why services jobs are finally contributing even as the services sector (demand for services) has slowed, as it did in the Q4 GDP report.
The payroll report looks authentic, and it jibes with the household report (actually it trails by a mile the huge growth being shown in the household report). At least as it echoes that report's signal of revival in the job market.
Is it going to be enough for Obama? It may been too soon to open this can of worms, but most econometric models that use economic data to predict elections find it is the level of the unemployment rate, not the change in the level that is the predictor. That suggests that the U-rate has long ways to go to re-elect the president.
But QE3 seems to be much less likely with the jobs picture brighter. Bonds are giving up ground fast. It is too early to plan for the Fed stopping its reinvestment program, but it is not too early to wonder. If the economy has finally turned a real corner, the world is about to change.
Europe has not turned over into recession either, but Europe still is touch and go. I, for one, am a bit more skeptical about the ability of German data to remain so robust when the eurozone issues are so serious, and not likely to be easily tied up without some real gut-wrenching action being taken. So I treat the US news as real and the euro news as on borrowed time.
Hey, if you want to remain a pessimist there is always something. But for now it is not the US job market.
Jobless claims are falling, and are down to much more moderate levels. The insured unemployment rate has been signaling a drop in the overall rate, a drop which we are continuing to get. Both rates are at cycle lows. The Challenger report on announced corporate layoffs is low, despite its year-on-year backtracking in January.
Hours-worked are up. Average hourly earnings made a small uptick, and with that we should be looking for a rise in personal income this month. The jobs report is not only a good surprise, and a surprise with upward revisions, but it is the Rosetta Stone for reports yet to be released this month. And what is implied for personal income and industrial output is really good news.
Last year consumption data began to spike in September and in October. With the increasingly strong seasonal factors, spending had higher hurdles to keep going in November and December; instead it seemed to go flat, but it did not backtrack. In January we have seen vehicle sales picking up and now evidence of income growth. Until today what we had in hand was the December PCE report in which the savings rate rose as income gains outpaced spending.
But since June the savings rate had been declining and staying low. There is a lesson here. Over time, consumers need to save, and need to have income in order to spend it. But in the short run, income and spending data are not tied into one. We know that people spend based on their notion of permanent income, and not their month-to-month in-hand money. When consumers see improvement, they may be willing to spend more. A drop in the savings rate may actually be a really bullish signal and not a sign of distress or of an imprudent consumer.
However you slice it, it looks like many of the things missing from the economy in this recovery are falling into place. Expect everyone to take credit. But most of all, look carefully at the Fed. Bernanke will not be quick to pull back unless something forces his hand. He has been among the most worried about the economy, and that may be more because, as Fed chairman, he feels some responsibility than out of true pessimism.
But at some point the Fed's worries will shift from worries about growth to worries about prices. And how quickly that happens depends on economic growth, job growth and the unemployment rate. The Fed does not want to be placed in the position of having still too-high unemployment with the economy surging. That is potentially the most "awkward moment" for a Fed chairman. Of course it's not in his forecast, but does it yet lie ahead in 2012?