By John Richardson
THE US economy is well and truly back is the conclusion you will reach if you read just the front page newspaper articles following the release of last Friday’s October jobs report.
“Friday’s numbers are a vindication of Fed chair Janet Yellen,” was, for example, what the Financial Times wrote on the front page of its 7 November issue, after it was announced that 271,000 new jobs had been created in October.
Not surprisingly, therefore, the US Federal Reserve has given a strong indication that it might well raise interest rates at its 15-16 December meeting, which will be its final meeting in 2015.
But the Fed is only talking about a small rate rise in December and gradual further interest rate rises after that. This suggests a great deal of nervousness about the underlying strength of the economy.
Incredibly, also, it has taken nearly seven years of the Fed benchmark borrowing rate being close to zero to reach a point where Yellen and her colleagues seem to feel that the US economy can withstand a moderate rate rise.
And as former US Assistant Secretary of the Treasury for Economic Policy Dr Craig Paul Roberts very convincingly argues:
- 145,000 of the new jobs, or 54%, are assumptions based on the “birth-death” model. The model is built around a normally functioning economy. But we know that over the past seven years, the economy hasn’t been functioning normally – hence, interest rates close to zero. Roberts therefore believes that the Fed has overestimated the number of jobs from new business start-ups and has underestimated losses from businesses shutting down. He therefore calculates that only 126,000 new jobs were actually created in October.
- But for arguments sake, let’s assume that the 271,000 jobs number is actually real. “According to the Bureau of Labor Statistics, all of the new jobs plus some—378,000—went to those 55 years of age and older,” wrote Roberts. But he added that males in the prime working age – 25 to 54 years of age – lost 119,000 jobs
- Roberts’ conclusion is that full time jobs have been replaced with part time jobs for retirees. He bases this on the fact that multiple job holders increased by 109,000 in October, which indicates that people who lost full time jobs had to take two or more part time jobs in order to pay their bills.
Newspaper headlines also made great play out of the drop in the percentage US unemployment rate to 5% in October, half of its level during the Global Financial Crisis.
Why is the 5% level so crucial? Because some people at the Fed, perhaps crucially Yellen herself, believe that this is close to the “natural level” of unemployment in the US. Once you go below this level, labour markets tighten, wages start rising and you need interest-rate rises. The Fed then hopes to stand back and pronounce that its quantitative easing policies have been successful.
But here’s the thing: As Edward Luce wrote in another FT article, which was published after the release of the September jobs report:
The official jobless rate has dropped to 5.1%; yet, if the labour force were as big as it was in 2008, the rate would be almost double that.
Real median household incomes remain stubbornly lower than they were in 2008. In some sectors, such as manufacturing, both jobs and wages are declining. There is little sign of America’s widely forecast manufacturing renaissance.
Returning to the October job report and Luce’s first point, the labour participation rate has remained stuck at 62.4%, its lowest level since 1977.
The participation rate measures the number of people actually looking for work, and so of course if so many people have decided to not to even bother looking for work, the headline percentage unemployment rate will have to fall. This means that the “natural level” of unemployment might now be a lot lower than 5%.
This all comes down to the basic laws of supply and demand. People are not looking for work because there is not enough demand to create enough work, and there is not enough demand due to the fall in spending as the Babyboomers retire. And because there is not enough demand to create enough work, middle class incomes are stagnating.
What happens next then? If you are a chemicals company what should you plan for?
Here is one seven-stage scenario:
- The Fed opts for a modest rate rise in December, and will very gradually further raise interest rates after that.
- These rate hikes won’t make, simply cannot make, that much difference because of demographics. The real US economy will continue to struggle.
- Most policymakers, economists, analysts, and journalists etc. will still fail to identify the underlying problem. It is that Western fertility rates in general have been below replacement levels (2.1 babies/woman) for 45 years since 1970.
- The consensus will instead blame the problem on the Fed’s decision to ever-so slightly raise interest rates, especially if this decision is said to have also inflicted “collateral damage” on emerging markets.
- So the clamour will grow for a fourth round of quantitative easing (QE4).
- But no decision will be taken on QE4 because next year will see the latest US presidential election cycle switch into full gear. QE4 will happen, therefore, but not until after the new US president has been inaugurated in January 2017.
- The launch of QE4 will push oil prices temporarily back to $100 a barrel as speculative funds flow back into commodities in general and into stock markets. This will further weaken a global that cannot afford $100 crude, and so prices will soon retreat again.