Think­ing dark thoughts

Financial Mirror (Cyprus) - - FRONT PAGE -

While many ex­cuses for the weak fig­ures are pos­si­ble— and will duly be set out be­low—the fact is that strong job cre­ation, which has av­er­aged 200,000 monthly since the US labour mar­ket be­gan ex­pand­ing, has pro­vided the clear­est and most con­sis­tent ev­i­dence to negate the past year’s de­clines in in­dus­trial pro­duc­tion and other in­di­ca­tors cited to sup­port claims that a US re­ces­sion was im­mi­nent or may al­ready have be­gun. While the case for a re­ces­sion re­mains un­con­vinc­ing, those of us whose main counter-ar­gu­ment has been the vir­tu­ous cir­cle of em­ploy­ment growth lead­ing to in­come growth, lead­ing to con­sump­tion and still more em­ploy­ment, must re­call John May­nard Keynes’s fa­mous dic­tum: “When the facts change, I change my mind.”

The key ques­tion is whether the facts re­ally have changed. Or were Fri­day’s shock­ing fig­ures just a tem­po­rary aber­ra­tion, a lag­ging in­di­ca­tor of the sea­sonal soft patch al­ready re­vealed by first quar­ter GDP fig­ures? Or maybe it was sim­ply a ran­dom blip to be ex­pected ev­ery now and then in a se­ries whose sam­pling er­ror is of­fi­cially stated as plus/mi­nus 115,000 at the 90% con­fi­dence level. This means that if the true in­crease in em­ploy­ment is 200,000 then a re­port that is ei­ther be­low 85,000 or above 315,000 can be ex­pected ev­ery year or so.

As it hap­pens, Fri­day’s head­line fig­ure of 38,000 was ac­tu­ally 72,000 once ad­justed for the 34,000 jobs that were tem­po­rar­ily sub­tracted due to the Ver­i­zon strike which was re­solved a few days after the sur­vey date. Once we add back these jobs the “un­prece­dented” data for May ac­tu­ally looks no worse than the tem­po­rary set­backs that have oc­curred since 2010 with roughly the an­nual fre­quency ex­pected: in March 2015 (84,000), De­cem­ber 2013 (45,000), April 2012 (75,000) and May and July 2011 (73,000 and 70,000). The pos­si­bil­ity that May’s pay­rolls were sim­ply a sta­tis­ti­cal aber­ra­tion is sup­ported by the very low level of ini­tial un­em­ploy­ment claims and strong hir­ing in­ten­tions re­ported by the Na­tional Fed­er­a­tion of In­de­pen­dent Busi­nesses and many pro­pri­etary sur­veys. But un­for­tu­nately, a purely sta­tis­ti­cal ex­pla­na­tion for May’s grim fig­ure is un­der­cut by the weak job growth also re­ported for April, re­vised down to just 123,000. It is this se­quence of two con­sec­u­tive months of much weaker than av­er­age job growth that gives real cause for con­cern.

Which brings us to the eco­nomic forces that could be be­hind an abrupt em­ploy­ment slow­down, if Fri­day’s data do not turn out to be just a sta­tis­ti­cal blip. The grimmest ex­pla­na­tion is the one that Charles has fre­quently sug­gested: mis­guided mone­tary poli­cies and ma­nip­u­lated prices in fi­nan­cial mar­kets sig­nals may have caused such ex­treme mis­al­lo­ca­tion of re­sources that the US econ­omy is now slid­ing into a se­vere re­ces­sion caused by col­laps­ing prof­its, fall­ing wages and ex­treme pes­simism among con­sumers and pri­vate en­trepreneurs.

But three more be­nign pos­si­bil­i­ties are worth con­sid­er­ing, at least un­til we see whether May’s very weak per­for­mance is con­firmed in sub­se­quent months:

1) A highly plau­si­ble, even in­evitable, rea­son for a slow­down in job growth is that the US econ­omy is now close to full em­ploy­ment. Even tak­ing ac­count of May’s very poor per­for­mance, job cre­ation this year has av­er­aged more than 150,000 monthly. That is well above the num­ber of roughly 100,000 cited by Janet Yellen in her speeches as the job cre­ation nec­es­sary to match US de­mo­graphic ex­pan­sion. At some point, a slow­down to around that pace of job cre­ation was bound to hap­pen—and per­haps that point has ar­rived.

2) There has long been a con­tra­dic­tion ever since 2010 be­tween fairly strong em­ploy­ment growth and un­usu­ally weak GDP growth. The re­sult has been abysmal pro­duc­tiv­ity per­for­mance, de­spite the ob­vi­ous ad­vances in tech­nol­ogy oc­cur­ring in so many sec­tors of the US econ­omy. Per­haps this pro­duc­tiv­ity gap is now be­gin­ning to nar­row. This could mean US GDP con­tin­u­ing to grow at the rate of 2-3% es­tab­lished since early 2009 and real wages start­ing to rise sig­nif­i­cantly, while em­ploy­ment sub­stan­tially slows.

3) Fi­nally, there is the pos­si­bil­ity that the US econ­omy has gen­uinely weak­ened in a lagged re­sponse to sev­eral shocks that oc­curred in the sec­ond half of last year: the cor­rec­tion in stock mar­kets, the panic over China, the col­lapse of oil prices, the strength­en­ing of the dol­lar and the loss of con­fi­dence in emerg­ing mar­kets. To these up­heavals could be added the po­lit­i­cal un­cer­tain­ties cre­ated by the Brexit ref­er­en­dum, the Euro­pean refugee cri­sis and the un­ex­pected twists of the US pres­i­den­tial cam­paign. Coun­ter­act­ing all these pres­sures, we now have the near-cer­tainty that mone­tary pol­icy will re­main ex­tremely re­laxed, with the rate hike pre­vi­ously ex­pected in June or July now off the agenda—un­less, of course, next month’s em­ploy­ment sta­tis­tics com­pletely off­set or re­vise out of ex­is­tence the grim news of last week’s pay­roll re­port. That was the most plau­si­ble ex­pla­na­tion for Wall Street’s bullish re­ac­tion to the “shock, hor­ror” news on Fri­day—and un­less there is fur­ther bad news from the US econ­omy or global pol­i­tics, the bulls still have a good chance of be­ing proved right.

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