INSIGHT: US Fed grows more worried over nation’s jobless rate

25 October 2012 16:55  [Source: ICIS news]

By Joe Kamalick

Fed chairman Bernanke raises new concerns over jobsWASHINGTON (ICIS)--The US Federal Reserve Board indicated this week that it is becoming quite a bit more worried about the nation’s employment prospects, saying that it may have to initiate still further stimulus measures in hopes of boosting jobs growth.

In a statement this week, the Fed said that the US economic recovery is continuing – but still at only a moderate pace.

The US central bank noted that jobs growth has been slow, unemployment remains high and businesses are cutting back.

While household spending has advanced a bit more quickly in recent months, the Fed said, “growth in business fixed investment has slowed”.

Along with the 900-pound gorilla of consumer spending, business hiring and corporate investment in plants and equipment are the driving forces of the US economy.

Consumer spending has gathered strength in the last four months, including a 1.1% boost in retail sales for September from August.

But consumer spending – which accounts for as much as 70% of the nation’s economy – does not necessarily boost jobs growth.

Employers, especially small business firms, have been reluctant to add workers in any great numbers this year. 

Jobs growth has been mediocre at best for much of 2012, in part because manufacturers and other firms became far more efficient with fewer employees during the Great Recession and don’t need as many workers as they had prior to the 2008-2009 downturn.

In addition, employers large and small have been reluctant to add new staff or make significant capital investments in plants or equipment because of a range of uncertainties that cloud the economic future.

Company owners are awaiting the outcome of the 6 November US national elections, and they also are worried about the possibly significant impact of the so-called “fiscal cliff” that confronts the US economy at year end.  That’s when congressionally mandated major increases in income tax rates and huge federal budget cuts will take effect, unless Congress and the White House can agree on modifications of one or both, and that prospect is seen as unlikely at best.

Earlier this month the National Federation of Independent Business (NFIB) reported that its small business members sharply reduced their hiring plans, and only 2% of surveyed business owners said they expect the US economy to improve in the near term.

That is significant because small businesses account for most new jobs creation in the US economy.    

The US unemployment rate did fall to 7.8% in September from the August measure of 8.1%, but that decline was attributed chiefly to an increase in the number of unemployed workers that have given up looking for work, with some 386,000 job seekers leaving the workforce.

Those discouraged workers are not counted as unemployed, so their statistical absence from the nation’s labour force lowers the number of jobless workers and consequently reduces the proportion of unemployed in the overall working population.

The Fed said this week that even with record-low interest rates and other measures the central bank has taken to drive down long-term borrowing costs, “economic growth might not be strong enough to generate sustained improvement in labour market conditions”.

The Fed’s key federal funds interest rate has been at 0% to 0.25% for nearly four years, and the central bank said that it will likely maintain that essentially zero rate at least through mid-2015.

There have been some bright spots of late in the US economy.  Auto sales are doing well, and the housing sector is clearly in recovery.

But the Fed noted that while the US housing industry has shown “some further signs of improvement”, that gain must be measured against the sector’s long-depressed level. Housing starts are climbing, but the level of new home construction is still less than half of the pace seen before the recession.

And while consumer spending has begun to edge up, the central bank pointed out that business investment has slowed.

Indeed, the Manufacturers Alliance for Productivity and Innovation (MAPI) said earlier this month that growth in the US manufacturing sector continued to slow in the third quarter, marking the ninth straight quarter of decelerating output by the nation’s production industries.

MAPI also cautioned that its survey of member firms showed “slowing growth for US manufacturing over the next three to six months” with “continued softening in the industrial base”.

In an indication that the central bank governors are increasingly worried about the US employment situation, the Fed said that it might take still further steps to try to stimulate more growth.

If the outlook for the labour market does not improve substantially,” the Fed said that it “will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved”. 

That policy along with its earlier stimulus steps, said the central bank, “should put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative”.

The key word there is “should”. Interest rates have been at record lows for nearly four years, but business development and hiring remain modest with little real growth.

According to many measures and analysts, US businesses are said to be sitting on huge cash reserves, but they are unwilling to make expenditures for either equipment or new staff until the future is more certain.

Major improvements in hiring are not likely until those uncertainties are resolved.

($1 = €0.77)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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