A recent on-line discussion of the Fed's continued inaction in the face of worsening economic data included the following exchange of comments:
Commenter 1: When you got nothin' but blanks left you just stand there with the gun and pretend you might pull the trigger
Commenter 2: Maybe Bernanke should just throw the gun
Now, two days after the Federal Open Market Committee's midweek meeting, we got another weak jobs report. True, the BLS news release tries to put a good face on things, headlining a gain of 163,000 payroll jobs and reporting that the unemployment rate was "essentially unchanged." A closer look at the numbers, though, shows that the report contains more bad news than good.
First, payroll jobs. The net 163,000 payroll jobs created in July (172,000 more in the private sector, 9,000 fewer in government) was better than the second quarter's average of 73,000, but well below the first quarter's average of 252,000. Furthermore, although the figure for May was revised up from 77,000 to 88,000, June was revised down from 80,000 to 64,000, meaning that those two months produced, on balance, 4,000 fewer jobs than we had previously thought.
Yes, the unemployment rate was "essentially unchanged," in the sense that it rose by less than half a percentage point, from 8.216 to 8.253 percent. Unfortunately, that meant an increase in the rounded rate - the only one anyone ever looks at - to 8.3 percent. That puts us back to January's figure, erasing all the gains for the year.
Furthermore, the details behind the headline also were not good. In a recovering economy, sometimes the unemployment rate ticks up because more people get jobs, but an even greater number of workers reenters the labor market. That was not true in July. Although the changes were small, the number of people in the labor force decreased and the number of unemployed increased. (These data are based on a separate survey of households, which sometimes shows a decrease in jobs even while the payroll survey shows an increase.) The broad unemployment rate, U-6, which includes discouraged workers and involuntary part-time workers, also increased by a tenth of a point, to 15 percent, its highest since January.
The broadest employment measure of all is the employment-population ratio. Seasonally adjusted, it fell to 58.4 percent in July from 58.6 percent in June. That is just 0.2 points higher than its all-time low of 58.2 percent, reached a year ago.
None of these numbers was available to the FOMC when it met earlier in the week. The committee looked at the numbers it did have, which showed both employment and inflation running below their target values, and decided against any dramatic new program of quantitative easing. It did, however, promise to reconsider if things were to get even worse, as Friday's employment report indicates they are doing.
Clearly, doubts about the effectiveness of quantitative easing are one thing that is holding the Fed back. As I discussed in a post last week, the doubts that QE, which means buying large quantities of securities, including long-term bonds, are not without foundation. FOMC members who think QE will not work may have concluded that the Fed's only remaining tool is the "expectations channel." A cynic might say that's just economist's jargon for bluffing - standing there looking like you might pull the trigger even though you know your gun is empty.
On the other hand, there are those who think past efforts at QE have been ineffective because they have been too limited in scope and duration. Those are the people who think it is time to do something, even something that is not certain to work, like throwing the gun.