The November employment report is out, on its normal date, and it was slightly better than expected. With 203,000 jobs added it was hailed in a Bloomberg article as a strong report, a sign that the economy is picking up and that consumers are going to be able to spend more.
In my opinion, we can’t treat 200,000 jobs added as the new 300,000 benchmark for a recovering economy. At most, I can say that we are stuck in traffic on the freeway but we just got to shift from second to third gear. It is a relief, that’s for sure, and perhaps a sign that it will clear up soon. As I try to look ahead I see another budget negotiation and I don’t trust the people who were stupid in October not to do something silly in January.
The good news is that the budget deficit is shrinking and it will continue to shrink if the economy improves. Eventually, the calls for austerity will begin to wane and the roadblocks will become fewer and farther between. I now hope that we will see 300,000 jobs added sometime in 2014. I have been waiting so long for that that I don’t even remember how it feels.
Back in September, even with the government shutdown looming, I was sure that the economy was picking up thanks to a string of low jobless claims numbers, the fed taper delay, and the resulting drop in mortgage interest rates spurring, in my opinion, renewed vigor in the housing market.
The release of a dismal employment report made me realize that the way I reach forecasting conclusions is simply wrong. So where did I go wrong? Is it as simple as admitting that I failed to take into account the magnitude of the damage caused by the shutdown? That’s probably it as it did cause consumer confidence to drop. Since the situation in Washington is not going to change at least until the next election, I can count on two headwinds: austerity and bickering. That might actually be a good thing: perhaps if we prevent a real recovery from taking hold we also prevent the next recession from brewing too soon and I can look forward to a few more years like this. That’s certainly better than 2009, but I do keep my eyes on household formation. Where are those new families living? Isn’t there huge pent-up demand for housing construction?
Without an employment report published for September it is hard to tell how things are going. My sense was, and still is, that things were beginning to get better, and by that I mean that the economy was finally taking a step in the right direction towards the goal of solid economic growth–which is still far away–after months of stagnation triggered by the Bernanke announcement.
It is also possible that we will never get to that stage in this business cycle that began almost six years ago. Yet this cycle might be particularly long because the economy might never sustain a growth rate greater than 3%. As of today, I have to also keep believing that some people in Washington will not let us come near to a debt default because if that were to happen none of this discussion would even matter.
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.
The Fed has spoken, there will be no tapering for the time being as “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”
In other words, the economy is nowhere near growing on its own at a sustainable pace. That is the sad truth but gives me some relief: at least it wasn’t just my analysis to conclude that. The coming debt-ceiling discussion (the third in twelve months) is enough of a head-wind for the economy that I think that the Fed will be very careful before actually beginning the tapering process.
As a small business owner I say thank you to Mr. Bernanke for being very careful and I resolve to improve our business by listening to our customers better than ever.