Preparing the Helicopters


It’s Labor Day weekend, so we will keep this week’s essay short (though do print out the Economic Beat, below, and take it with you when you go back to work). It isn’t hard to be brief, as the whole week – if not the whole month – was been about little else but what the Federal and European Central Bank (ECB) might do next. How much money will they give us, and when, and why, etc.

While many were hoping that Fed chairman Ben Bernanke would announce something concrete at the annual Jackson Hole, Wyoming symposium on monetary policy sponsored by the Kansas City Fed (it prefers the term “economic” policy), most mavens were of the correct opinion that he would not. However, he did manage to let the stock market finish on a higher note anyway by making a strong, even defiant case for more accommodation by the Fed.

What was notable about Bernanke’s speech was the focus on employment as a platform for action. By dialing in on jobs, the chairman was preparing the ground from a legal and political standpoint. The Fed has a mandate for employment, employment is lagging, therefore the Fed must do more because it’s required to do so. What’s more, the good doctor went on to present a dossier of analysis detailing the blessings of previous policy in terms of lower interest rates, higher stock prices, and most of all (though perhaps not from the market’s view), jobs.

You can expect some push-back on those assertions, but for now all market eyes are looking forward to the next ECB meeting on September 6, followed by the Federal Open Market Committee (FOMC) announcement on September 13th. While much has been written about the Fed not wanting to pull the trigger on more easing so close to the election, at this point Chairman Ben has little to lose. Republican candidate Mitt Romney has repeatedly stated that he will not reappoint Bernanke to another term, and the political rhetoric of the past year has certainly given the chairman some grounds for believing that a 2013-vintage Republican Congress would be inclined to rewrite the Fed’s charter anyway.

Bill Gross and others (including this column) remarked that another round of quantitative easing is likely to have very little impact on the real economy. However, if it has the stock market sitting on new highs on the first Tuesday of November, Dr. Bernanke may well believe that he has done what’s best for the economy and the Fed.

Bernanke famously once said that the Fed could, if necessary, drop money from helicopters to unstick the economy. It was meant in a lighthearted vein, but we don’t doubt that the pre-eminent scholar of the Depression is prepared to do more. We do doubt very much that another round can fix the economy, or that the ECB can buy Europe a way out of a recession, but the equity market would very likely give them the benefit of the doubt – at least for a time. With the opposition party seemingly ready and willing to reboot the central bank anyway, getting the helicopters ready may well appear to be the lesser of evils in this most polarized of times. We wouldn’t bet against it.

The Economic Beat

Given Bernanke’s emphasis on lagging employment, it seems like a good time for some numerical perspective on the matter. A lot has been said in recent weeks about the sudden improvement in economic data, but we think seasonal adjustments are distorting matters, a by-product of the difficult 2008 and 2009 years.

Looking at actual monthly employment data from 1980-2012 – that is, not seasonally adjusted – the pattern in the economy is for the end of the year to produce a large turnover in the workforce, such that the number of jobs counted in January is typically around 2% less than the number counted in December. The end of the second quarter also produces a drop. In a good year, the change in jobs for the first seven months is positive. The 1991-1992 recession produced two consecutive years where there was a net loss over the first seven months; the 2001-2002 recession three consecutive years. The 2008-2009 recession has produced five consecutive years. The net change through the first seven months of 2012 is only (-0.07%) and could still be revised away (it would take an upward revision of 97K in all), but either way we are in weak territory. Our database doesn’t go back that far, but it’s likely the first time since World War II for five such years in a row.

Still, things are getting better, however slowly. The year-on-year employment change in July of 1.4% was the best for the month since 2006, and somewhat above the 30-year July average of 1.26%. The current four-week moving average in unadjusted jobless claims is at its lowest level since November of 2007. It’s a higher percentage of the workforce now – 0.25% vs. 0.23% in 2007 – and things were starting to rapidly deteriorate five years ago, but it’s still the lowest level since then. Actual claims have improved at a steady year-on-year trend all year, right through August. At over 3.1 million, though, long-term unemployment remains at recession levels.

So the chairman does have some grounds for saying job growth is too slow, even if it isn’t at all clear that printing more money will do the trick. The Fed’s problem is that if it takes accommodation off the table while the global economy is slowing, and confidence falling at both the consumer and producer levels, an equity market correction could tip the low level of growth back into the red – and perhaps tip the election as well. Maybe the Fed should stick with the old trick of teasing the markets indefinitely with the promise of more easing “if necessary” without ever quite doing it.

Moving at holiday speed through the rest of the data, both the Dallas and Richmond Feds produced another round of negative survey results, yet Kansas City posted a positive reading. The Chicago PMI came in with a positive, on-consensus result, but it was the lowest reading since late 2009. Factory orders were better than estimated, thanks to strength in aircraft, though many underlying components were weak.

Consumer confidence took a sharp dip back to the lowest level since last November, but the University of Michigan’s sentiment index was steady. The Beige Book was a mixed bag, GDP for the second quarter was revised upwards to 1.7% from 1.5%, and pending home sales were positive with the Case-Shiller home price index rising slightly. Personal income and spending improved modestly in July.

The big reports next week are the ECB announcement Thursday and the August jobs report Friday. Other highlights include the ISM manufacturing report on Tuesday and the ISM non-manufacturing report on Thursday, which also has the ADP payrolls report.

All U.S. markets and banks are closed Monday, September 3rd. Enjoy the weekend and drive carefully!

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