No More Monetary Medicine This Cycle?

Another day, another symptom of recession to digest.

Today's statistical confirmation is brought to you by the monthly change in nonfarm payrolls, which lost ground in March, reports the U.S. Labor Department. Meanwhile, unemployment popped up to 5.1% last month from 4.8% previous, pushing the jobless rate to its highest since May 2005.

The loss of 80,000 jobs last month was only slightly worse than the 76,000 slippage the month before. More troubling is the fact that the economy has suffered job destruction for three months running, a stretch of red ink that hasn't occurred in this data series since 2003. As economic signals go, the triple-month slip is quite robust. Any one month is subject to revisions, of course, but the general trend can't be denied for such a crucial economic indicator as payroll changes.

"Strong relationships exist between the employment data and virtually every other economic indicator," advises Richard Yamarone, director of economic research at Argus Research, in his book The Trader's Guide to Key Economic Indicators. "The growth rate of nonfarm payrolls, for instance, is strongly correlated with the growth rate of GDP, industrial production and capacity utilization, consumer confidence, spending, income--even with Federal Reserve activity. If it's relevant to economic activity, it will have links with the payrolls data."

Alas, as you can see from our chart below, the trend in nonfarm employment has turned decisively down. Meanwhile, today's news only corroborates the negative signal in yesterday's update on weekly jobless claims (click to enlarge).

It's easy to jump to conclusions and assume that the Fed will now cut interest rates again in the wake of the employment picture. Perhaps, but it's not yet obvious in Fed funds futures prices. The Fed funds rate currently stands at 2.25%, down from 3.0% previously after a hefty cut at the March 18 FOMC meeting. The next scheduled confab is April 29 and 30. Judging by the futures market, however, the jury's still out on whether another cut is imminent, suggesting that the central bank has already dispensed its monetary medicine for this cycle.

Indeed, if the current downturn proves to be short and shallow, one could argue that the Fed's pre-emptive liquidity injections will suffice. All the more so if one is worried (as is your editor) about the inflation outlook. Of course, all bets are off if upcoming economic reports show a worse-than-expected economic contraction is unfolding. Unfortunately, it'll be a month or two at least before the downturn's true nature will begin to emerge. The future is as cloudy as ever no matter where we are in the cycle. Worrying and nail-biting, of course, roll on with full transparency in real time.