Special Report-US recovery and the jobs outlook
Wednesday, April 14th, 2010Investors are becoming more focused on whether the Fed will change its policy guidance and drop its “extended period” language as the US recovery improves. A change in the “extended period” language would set the stage for the eventual tightening of monetary policy by the Fed. The US reported better than expected retail sales growth in March with business inventories at the highest level since July and inflation subdued. Today’s jump in US retail sales and the restocking inventories may increase speculation about a change in the Fed’s policy guidance. An influential think tank (Medley) suggests that the Fed may soon change its policy guidance. In his prepared statement before Congress today Chairman Bernanke was cautiously optimistic about the US recovery but he made no reference to “extended period” language. The lack of reference to the “extended period” language dampened speculation that the Fed will change its policy guidance anytime soon and USD traded lower. Bernanke went onto say that he sees some encouraging signs in the labor market as layoffs are slowing, but he remains concerned that 44% of those out of work have been of work for more than six months. Bernanke says that it will take a significant amount of time to restore the 8.5mln jobs lost during the recession.
Fed officials have indicated that Fed policy will be data-driven and the most important data set is employment. Until the Fed sees a sustainable uptrend in employment growth the Fed is unlikely to hike interest rates. Subdued inflation will allow the Fed to maintain low yields for a longer time as inflation expectations remain well anchored. Focus turns to Thursday’s release of US jobless claims. Jobless claims need to fall below 400k to confirm that the US economy is creating enough jobs to reduce the headline unemployment rate. Jobless claims for the week ending 04/10 are expected to fall to 440k from 460k last week. The jobless claims report will likely confirm that layoffs are slowing but it remains unclear if the US recovery will be strong enough to create enough jobs to significantly reduce US unemployment.
Robert Reich penned a piece in Tuesday’s Wall Street Journal titled “The Jobs Picture Still Looks Bleak”. According to Reich it is hard to see how the US will experience a vigorous economic recovery with unemployment elevated and the housing market still on shaky ground. The White House and a number of economists cheered last month’s unemployment report which showed that the US added 162k jobs. Reich notes that a third of the jobs created in March were temporary and that when you subtract the temporary jobs just 122k jobs were created. This according to Reich is less than the 150k new jobs needed just to keep up with population growth. During the recession that started in December 2007 8.5mln jobs were lost. According Reich because of the length of the recession the US economy failed to create another 2.7mln jobs that were needed to match population growth. This means the US has lost close to 11mln jobs since December 2007. Reich says that even if 300k new jobs are created every month it would take five years to catch up to where the labor market was when the recession began. In addition Reich notes that consumer spending is unlikely to return to pre-recession levels because many families rely on two incomes and during the recession a number of families have been faced with the loss of one wage earner. The loss of one wage earner, the decreased value of home prices and lower wages will limit the recovery in consumer spending and points to a weak recovery. According to the Commerce Department’s Bureau of Economic Analysis personal income for Americans excluding government payouts has fallen by 3.2% since Obama took office in January 2009. Reich also expressed concern that a number of US jobs that have been lost are unlikely to ever return.
According to an AP survey US unemployment is likely stay high for the next two years dropping to 9.3% at the end of 2010 and to 8.4% at the end of 2011. Mark Zandi Chief economist at Moody’s Economy.com says unemployment could rise above 10.2% as people who have given up looking for work have not been counted in latest unemployment data and will be counted when encouraged by the recovery look for work again. Thursday’s jobless claims report is expected to confirm that initial claims continue to fall and the trend for improvement in the US labor market continues, but as Reich says the economic recovery may not be strong enough to create the number of jobs needed to bring the US unemployment rate back toward pre-recession levels. Jobs growth is expected at 220k in April, 250k in May and 150k in June. The White House Council of Economic Advisors says the stimulus package created or saved between 2.2mln and 2.8mln jobs trough Q1 2010 and the US is on track to create or save 3.5mln jobs by the end of the year. Thursday’s initial jobless report is unlikely to alter the outlook for steady Fed policy or intensify speculation that the Fed will soon drop its “extended period” language. This means that the trend in US equity and commodity markets will likely continue and USD may experience light selling pressure as the Fed remains on hold.
Written by Easy-Forex
