The Labor Department released some new jobs data this week. The news was, for the most part, positive compared what many of us were fearing given the threat of double dip recession. Nonfarm payrolls increased by 103,000 jobs and September and August numbers were also revised upward, making the end of the summer look stronger than it had previously. Government employment continues to be a drag on jobs growth with a loss of 34,000 jobs. Despite the government data, the overall picture of the US economy is that despite continuing external shocks growth is sustaining at a low to moderate rate. Again this is good news, though not as good as we’d all like to see at this point along the recovery. As you can see in the articles posted, the economy has yet to average over 100,000 jobs added per month this year.
One of the most encouraging parts of the jobs report are the near 30,000 job increase in the construction sector, which was hit extremely hard by the collapse of the housing and construction boom and subsequent credit crunch on potential homeowners. The credit crunch had the effect of pushing housing prices to continually lower levels and preserving a large slack in supply even though mortgage rates are near 4% (very low). Along with construction jobs increases, the ISM manufacturing index reported expansion in the manufacturing sector. This is a comforting number as German industrial output stalls along with growth and the Chinese manufacturing index hovers near 50 (the inflection point between increase and decrease). The somewhat stronger-than-expected economic data validates a theory posited by some economists, including Ben Bernanke (though he was talking about inflation), last spring that a confluence of external shocks, such as high commodity prices, the war in Libya, the eurozone crisis, and Japan’s Fukushima tragedy were going to weigh heavily on growth in the United States during the summer but would subside as the year went on. With jobs growth upwardly revised for the two most recent months and job growth slightly higher than expected we may be seeing the recovery take hold again as external shock factors subsiding.
This may take some of the pressure off the Federal Reserve to expand its efforts to boost employment beyond the balance sheet reshuffling it is currently doing in an attempt to push down the longer term bond yields. For reference, once the Federal reserve has lowered its interest rate to near 0.0%, it is forced into manipulating treasury bond yields as this has a similar effect to the economy that a decrease in the fed funds rate has. Both quantitative easing programs were examples of this type of behavior. Likewise, president Obama may find increased resistance to his new spending bill, already unpopular with house Republicans, in light of more durable apparent growth. However, with unemployment holding at 9.1% and the number of long term unemployed increasing still, both the fiscal and monetary authorities are bound to find themselves criticized no matter which direction they take policy.
As far as I can see the United States economy looks to be avoiding dipping back into recession this year, but it is still stuck in growth too slow to clear the labor market. The threat of Greek default or further contagion effects in the eurozone represent the greatest obstacle to a self-sustaining US recovery. If Greece defaults, as I think it will, I’m not convinced we’ll be sent into recession as the overall debt (in USD) that Greece owes is still less than the $447 billion jobs package before congress now.
On the other hand, Italian debt stands at about $2 trillion dollars, which is quite obviously too big to bail out. This isn’t helped by the fact that Fitch downgraded both Italian and Spanish debt on Friday. The failure of municipal lender Dexia is also casting eyes on whether Europe’s stress tests were rigorous enough to begin with. If this were the case, other European banks could fail in the event of a Greek failure. Pretty much, this is the opposite of what Angela Merkel and Nicolas Sarkozy want to hear right now.
A Greek default will certainly hurt euro credibility and could ricoche into Italy causing a more widespread default event or expose French banks (SocGen was also recently downgraded). If the world loses confidence completely in European institutions, what could result is the Italian government finding it even harder to find bond buyers, which would only push yields higher. This story ends in a self-fulfilling prophecy of the markets becoming more and more spooked by southern European debt and Northern European exposure, which then runs full cycle and exacerbates the whole situation.
The information to glean from all this is that the United States is proving more resilient than initially expected to the international instability present over the summer, but continued problems in the euro zone pose a threat that is impossible to ignore. It is now painfully clear that the attempt by Angela Merkel and Nicolas Sarkozy to “muddle” (my words) through this crisis has failed miserably and that swift action must be taken to preserve the global economy. If the eurozone should enter recession this quarter (Germany did fail to grow at all over the summer and industrial output as I mentioned has declined) it could very well tank the American recovery. This leaves the emerging markets to carry world growth, but investors increasingly have concerns about China’s debt burden. Inflation is still above 6% in China and high elsewhere in the BRIC scene. This doesn’t leave the BRICs with much room to provide their economies with stimulus should export demand falter. The world’s eyes remain fixed on the eurozone.