In my last post, I said that the Fed made the right decision because the economy has been weak this quarter and it is going to face some fiscal headwinds. By fiscal headwinds I was really envisioning the debilitating debate in Washington over the debt ceiling. I should have been more specific and called it theatrical headwinds. Although it is easy to think that the government shut-down will be averted or at least short-lived, the specter of a threat of government default pushed to the very last minute is all too real. The other thing that worries me is that this discussion could lead to the third round of fiscal tightening in the span of less than a year. I don’t care how well people think the economy is doing: if you keep on throwing water on the fire it will begin to extinguish.
So, if rising interest rates are damping the housing recovery and uncertainty is sapping consumer confidence (at a five month low) is there any reason for optimism? Is the better growth for the second half of the year that economist have been forecasting going to materialize? The answer is yes and no. I think that there is a signal that is pointing to a pickup, eventually, in employment: the drop in jobless claims that has been remarkable during the last month. Eventually this might lead to significant employment growth (at least 300,000 jobs added per month), but I am afraid that continuous fiscal tightening will prevent this from happening.
Economists are predicting 180,000 jobs added in September. I am willing to hope for 200,000 based on the Bernanke delay, the positive jobless claims, and the fact that a shutdown and a default have not yet materialized. If they are avoided, then we can start thinking about a real recovery taking hold.