Not Entirely Surprisingly, Payrolls Disappoint

Although the impact of the Fed’s announcement to taper its Quantitative Easing program had a greater-than-expected impact on the economy, I think that that impact has been absorbed. The one-two punch of tapering and fiscal tightening would be a blow so I hope that Congress will be sensible in October.

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I follow economic indicators like a hawk because they help me forecast inventory. That’s because I have to always figure out demand six to nine months in advance. The unemployment report that comes out on the first Friday of them month is the one indicator that I need to follow even if I ignore everything else. It is simply the most timely indicator of how the economy is doing right now.

For me, it is not an indicator that helps me forecast. It simply helps me figure out if my forecast was correct or it needs readjusting because it tells the story of how the economy did last month.

Payrolls rose by 169,000, less than the 180,000 forecast. But what is most telling, and confirming of my theories, is that July was revised down all the way to 104,000. I attribute this to the Fed’s announcement that they are going to begin tapering and the expectation that they are going to begin the tapering in September by $20 billion.

I think that the Fed is going to look at all the economic data, including the fact that there is another debt-ceiling discussion on the horizon, and realize that the continuing fiscal tightening is making it very hard for the US economy to find its footing. In addition, they are going to realize that their announcement (and before that the rumor of an announcement) has caused enough of a rise in interest rates that the housing recovery is definitely not booming, and that it has caused consumers to rush into purchases of houses and cars at the expense of other categories. As a result, it is hard to think of this recovery as broad and self-sustaining.

I think that tapering should wait until payrolls rise by more than 200,000 on average per month, and I wouldn’t be surprised if the Fed decides not to taper or taper by a tiny amount such as $5 billion so I will be watching that announcement very closely. I hope that they realize that tapering and fiscal cliff negotiations might provide a one-two punch to the economy that we are going to have to scale back GDP growth projections that, according to economists, see the second half of 2013 growing at more than 2%.

Having said that, I think that the shock of the announcement is largely absorbed by now. I expect September to be a good month for jobs and I realize that QE cannot go on forever. I just wish that the Fed and our Congress treated the economy more gently and more predictably. In reality, I am more worried about another round of fiscal tightening in October than QE tapering.

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