Two Steps Forward
Written by Jeff Thredgold, President, Thredgold Economic Associates
Of the three major economic and financial developments of the past week two could be viewed positively, while one falls into the “wait and see” camp. First up, American job creation was better than expected during the month of October. In addition, employment data of the two prior months was revised to be less ugly.
Second, political change in the U.S. Congress was also an important step to getting the federal government under control. Finally, the Federal Reserve’s announcement of another $600,000,000,000 in U.S. Treasury security purchases could modestly help the economy…it could also backfire.
The American economy added 151,000 net new jobs during October, substantially better than the 68,000 net gain expected. Just as positive was the substantial revision to data of the two prior months, suggesting that 110,000 fewer jobs were lost.
The nation’s unemployment rate remained at 9.6% for the third consecutive month. The rate will likely decline in a most stubborn fashion during the next 12-24 months…and could actually rise for a time as better economic news entices hundreds of thousands of people back into the labor force.
No doubt the Obama Administration and the Democratic Congressional leadership wished the more positive jobs data could have been available before the elections. After all, heading into an election with four consecutive months of painful job losses…and a near double-digit unemployment rate despite massive government stimulus…did not exactly endear Administration and Congressional performance to voters.
- I would argue that one major reason employment data was better than expected in October was the rising and widespread expectation that the Democrats were in serious trouble, with heightened optimism that Republican control of the U.S. House of Representatives, and possibly of the U.S. Senate, could help derail or slow the government juggernaut unleashed over the past two years
- I would also argue that employment data of recent months would have been even worse if the current Democratic leadership in the House had been widely expected to remain in power
This is NOT a strong testament to Republican politics. It is a testament to split government and a means to hopefully address projected $1,000,000,000,000 annual budget deficits for years to come, a massive borrowing binge that could ultimately move this nation toward financial peril.
The employment data was clearly better than in earlier months. However, it needs to continue to improve in a major way to address the millions of still unemployed people, as well as those distressed workers on the edge of financial ruin.
As noted ad nauseum, the U.S. economy needs to add 130,000 jobs monthly just to keep the unemployed rate unchanged…just to meet the needs of a rising population and a rising labor force. Consistent net job gains monthly in the 250,000-400,000 range will be needed to make any sizable dent in the nation’s 9.6% unemployment rate, still near the highest level in 30 years…
…don’t hold your breath
The seismic shift of at least 60 seats in the House of Representatives from Democratic control to Republican control was primarily a vote against the government expansionary policies of President Obama and the Congressional leadership. It was much less a vote of confidence in Republicans.
One Congressional leader aptly noted that the Republicans would now be on “probation” as to their ability to get government spending under control. Bare in mind it was only four years ago that Republican leadership in the Congress was dismissed by voters as they had seemingly lost their way.
Unease Regarding QE2
The Federal Reserve’s latest venture into uncharted waters follows its announcement to purchase up to $600,000,000,000 of additional U.S. Treasury securities over the next three quarters (a process known as quantitative easing 2, or QE2). This move follows the Fed’s prior purchase of $1,700,000,000,000 of U.S. Treasury securities, U.S. Agency securities, and mortgage-backed securities. Each move was/is an attempt to nudge long-term interest rates even lower as a means of helping the economy.
The Fed will pay for these securities with…you guessed it…newly created money. Note: money creation of this type has nothing to do with a printing press. It is done through a process known as “open market operations.”
Central bankers and government leaders around the globe have been critical of the Fed’s latest move. They fear its efforts are an indirect means of weakening the dollar, thereby boosting U.S. exports at the expense of other nations.
The Fed is also trying to generate a modest increase in inflation, thereby minimizing any deflationary threats to the economy. This attempt could misfire.
To quote Dian Cohen, “Having a little inflation is like being a little pregnant.”
Wither the Tax Cuts?
The first major order of business will likely occur during November’s second half as the President, current Congressional leadership, and the new kids on the block in the House begin deliberations on extending the Bush tax cuts of 2001 and 2003. The Democrats want to extend the tax cuts for roughly 97% of Americans, but deny their continuation for the highest income earners. The Republicans want to extend the tax cuts for all, noting it is those with incomes of $200,000 and above (joint returns of $250,000 and above) who are primarily the job creators and investors in this country.
Three options seem to be on the table as the President has indicated in recent days his willingness to be somewhat flexible on the matter…
- He could offer to extend the Bush tax cuts for all income earners for 1-2 years, hoping to get a better read on the economy as 2011 progresses. He would likely demand an extension of soon-to-expire unemployment benefits as a trade-off
- An agreement could be reached to extend the tax cuts for a period of 1-2 years, or even longer, for all those making less than $1 million annually, again with Presidential interest in extending unemployment benefits
- The energized Republican leadership could stonewall any discussion that does not include a long-term extension of the tax cuts for all income earners, knowing that the House Republicans could pass an extension to their liking in early January. The new Republican leadership could likely count on numerous battle-weary Democrats in the Senate (with a wary eye toward 2012 elections) to support such an extension…pass such a bill in both houses of Congress…and then dare the President to veto it