We noted in our Tea Leaf issue dated July 29 that such a move to reappoint Bernanke would be a wise choice. His reappointment was also supported by roughly 90% of forecasting economists. Changing horses in mid-stream is not usually a good idea…and especially this time…given the depth, slippery rocks, and icy temperatures that “Captain” Bernanke is currently steering the economy through.

The President noted that Bernanke “has led the Fed through one of the worst financial crises that this nation and this world have ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

The Fed Chairman thanked the President for his “unwavering support for a strong and independent Federal Reserve.” Bernanke pledged “to help provide a solid foundation for growth and prosperity in an environment of price stability.”

Challenges Ahead

This reappointment, as well as Bernnake’s use of key terminology, was critically important because of the tough course that is yet to be followed by the Fed. At some point, the Fed will begin to withdraw much of the temporary monetary stimulus that has helped to stabilize the economy and financial markets.

These moves will be more of a two-step process than ever before. Unprecedented moves by the Fed, grouped under the banner of “quantitative easing,” have been undertaken during the past two years to help domestic and global financial markets return to some level of normalcy.

Many of these moves have had the desired effect. Other markets remain more limited in scope and volume, requiring a continued Fed participation.

More public will be the Fed’s first moves, expected by most forecasters sometime during mid-2010, to increase the federal funds rate from the record low target level of 0.00%-0.25%, which has been in place since mid-December 2008.

Rising Criticism

A possible series of modest tightening moves next year could draw strong Congressional criticism as it pushes financing costs higher. The Congress would make the case that “the Fed is taking the punch bowl away from the party just when the party in getting going.”

Come to think of it, the Congress ALWAYS complains when the Fed is pushing its key interest rate higher. Such moves could also draw criticism from the Administration, although such views would likely be expressed behind closed doors.

At this same time of rising tensions between the Fed and our illustrious elected representatives, Bernanke is very likely to be increasingly critical of the enormous budget deficits now expected. He will make it clear that deficits of roughly $1,000,000,000,000 annually during the next decade are simply not affordable and would do great damage to this nation…

…touché

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 26 August 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

Image used under creative commons.

Indeed, I would make the case that the Fed Chair, through his or her influence upon short-term interest rates (which leads to economic stimulus or economic restraint), current inflation pressures, and expectations of future inflation (which greatly influences the level of long-term interest rates), has perhaps more influence on our day-to-day lives than does the President.

The Fed has an ability you and I do not …the ability to create money. With this power comes enormous pressure from the bond market to do it responsibly so as to keep inflation pressures under control.

The Fed enjoys a reasonable level of “independence” to make difficult choices when necessary—such as pushing short-term interest rates higher to control inflation, usually resulting in a slowing economy and rising unemployment. This independence is vital to the Fed’s inflation-containment credibility.

Three major issues involve the Fed in coming months…

1) One of the most important decisions to be made by President Obama in coming weeks is whether to reappoint Federal Reserve Chair Ben Bernanke to another four-year term. Bernanke’s current four-year term ends in January 2010. In my view, the President would make a wise choice in reappointing Bernanke, a view shared by more than 90% of forecasting economists in a recent survey.

What we don’t need is greater uncertainty about monetary policy. Were Obama to propose someone seen as an Administration “puppet” in regard to impending monetary policy, similar to President Carter’s disastrous appointment of G. William Miller as Fed Chair in 1978 (which led the U.S. dollar sharply lower and long-term interest rates sharply higher, tied to loss of credibility), the results could rival those of three decades ago.

The Fed, along with the U.S. Treasury, has taken unprecedented steps during the past two years to avoid the potential of an even greater domestic and global economic calamity than currently exits. As some suggest, the “Depression” option is no longer in the cards.

The Chairman has drawn frequent criticism for some of the steps taken, including the “bailouts” of Bear Stearns and AIG. In hindsight, some of that criticism may be warranted. However, the financial system was on the brink of collapse last fall. Aggressive steps were required and delivered

2) The second major issue is the desire of many in the Congress to bring the Fed under greater Congressional control. One effort, led by frequent Presidential candidate Rep. Ron Paul, seeks a regular audit of the Fed’s conduct of monetary policy. Paul seeks the elimination of the Fed itself. Given the Congress’s highly political bias, and inability to keep wasteful spending under control, one simply cringes in fear at the prospect of the Congress having a greater say in the conduct of monetary policy

3) The third major issue is how and when the Fed will implement its “exit strategy” from recent extraordinary monetary stimulus. The Fed is widely expected by forecasting economists to begin pushing its key short-term interest rate higher within 6-9 months from today’s historic low. Various moves to reverse other forms of unprecedented stimulus, known as “quantitative easing,” will likely begin by the end of this year.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 29 July 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from franckie under Creative Commons license at Flickr.com.

One more month…one more exceedingly painful U.S. employment report

We have now had seven consecutive terrible job reports since the American consumer was told “the sky was falling” last September 18 by Federal Reserve Chair Ben Bernanke and then-U.S. Treasury Secretary Paulson. It was on that day that this dynamic duo emotionally and very publicly asked the U.S. Congress for $700,000,000,000 to fix financial markets.

That request, and the up-and-down discussion within the U.S. Congress during the following week, simply scared the American consumer to death. The consumer stopped spending…companies of all sizes adopted a “shoot first, ask questions later” approach to layoffs…and the economy dropped quickly. The rest, as they say, is history.

U.S. Employment Growth

The Numbers
Total U.S. employment fell by another 663,000 net jobs during March, matching economists’ consensus view. February’s previously reported loss of 651,000 jobs was not revised. That’s the good news. However, January’s previously reported (and previously revised) loss of 655,000 jobs lost was revised to show a loss of 741,000 jobs during the month—the worst month for job losses in 59 years. April losses will be ugly as well.

Equally painful was the surge in the nation’s unemployment rate from 8.1% in February to 8.5% in March, the highest level in 25 years. By comparison, the jobless rate was 5.1% just one year ago. The jobless rate averaged 4.6% in both 2006 and 2007 and 5.8% during 2008. An American jobless rate at or slightly above 9.5% is a real possibility within the next 9-12 months.

Economists have pointed out a handful of more positive economic statistics in housing, manufacturing, and retail sales in recent weeks to suggest that the U.S. economy is seemingly in the process of bottoming out. The consensus view of forecasting economists, as well as the collective view of the stock market, is for a return to marginally positive (yes positive!) U.S. economic growth during 2009’s second half.

We continue to expect GDP to be slightly positive during the fourth quarter. There was nothing in the March employment data to support this view, although yes, employment data is a lagging economic indicator.

Job Demise
The American economy has now lost 5.1 million jobs since the U.S. recession officially began in December 2007. Nearly two-thirds of the job erasures have occurred during the past five months alone.

As noted previously, the net loss of 3.1 million jobs during 2008 was the worst year for employment since 1945. To illustrate just how bad the first three months of 2009 have been…if no additional job losses were recorded over the balance of the year, 2009 would still be the fourth worst year since the U.S. Labor Department began tracking such data in 1939 (CNNMoney.com).

Inside the Pain
To illustrate just how pervasive and all-encompassing the current lengthy recession is, almost no employment sector is avoiding job cuts. The nation’s goods producing sector lost another 305,000 jobs during March. U.S. manufacturing was hit with the loss of another 161,000 jobs during the month, the 16th consecutive monthly decline. The nation’s embattled construction sector lost another 126,000 jobs, the 21st month in a row of cuts.

Equally dismal was the 358,000 net decline in service sector employment. The professional & business services sector lost another 133,000 jobs, while retail trade saw another 48,000 jobs bite the dust. Leisure & hospitality lost another 40,000 jobs, the finance industry lost another 25,000 jobs, and government employment declined by 5,000 positions. Only the education & health services category saw rising employment, although the net increase of 8,000 jobs was the weakest in that sector in many moons.

Better news was found in regard to the average hourly wage, which rose 0.2% (three cents) to $18.50 hourly. While the 3.4% rise over the past 12 months is hardly worth writing home about, it looks good versus consumer inflation which has been essentially zero during the past year.

More Jobless
Almost everyone knows one or many people who have seen their jobs disappear during the past 12-24 months. Prospects to replace these jobs with similar income levels are, for most, difficult. Such is the nature of a recession, especially the long and deep variety from which we are currently suffering.

A record 13.2 million people are now officially unemployed. Even more painful is the “underemployment” rate. This rate, which attracts rising attention each month, includes those who are unemployed, those who are working part-time but would prefer to work full-time, and those discouraged people who have dropped out of the labor force but would accept a job if one were offered…

…the “underemployment” rate is now 15.6%, up from 14.8% in February, and the highest since this particular measure began being tracked 15 years ago. This rate will move higher in coming months as well.

College Grads
Current job prospects for new college graduates are dicey. The National Association of Colleges and Employers forecast that employers will hire 22% fewer graduates this spring (The Associated Press).

More newly minted graduates are required to pound the pavement for jobs, rather than simply waiting for recruiters to visit their campuses. That may actually be a good thing. Since the average graduate will change jobs three times within five years of graduation, developing good job search skills now may just come in handy.

Pick Your Poison
No gender, race, or education level avoided the employment ax in March. The jobless rate for adult men spiked from 8.1% in February to 8.8% in March as traditionally male-dominant (can I say that?) sectors such as manufacturing and construction got hammered. The jobless rate for women rose from 6.7% to 7.0%.

The jobless rate for Whites rose from 7.3% in February to 7.9% in March. The jobless rate for those workers of Hispanic or Latino ethnicity rose from 10.9% to 11.4%. The jobless rate for Blacks or African-Americans actually dipped by 0.1%, but was still an unacceptably high 13.3%.

Unemployment rates for those of all educational levels also rose during the month. Those with at least a bachelor’s degree had a jobless rate of 4.3%, with the rate moving higher for those with less education. The jobless rate for those with less than a high school diploma? 13.3%!

We will get through this recession, but seeds of new growth will continue to be seen in other sectors besides and before employment.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 8 April 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from Rob Sheridan under Creative Commons license at Flickr.com.

FED VIEW |

The consensus view of 47 private sector national economists expressed in the previous Thredgold posting is roughly supported by the latest official forecast of the Federal Reserve. It is equally “dismal,” a term used recently by Fed Chair Ben Bernanke.

The Fed’s forecast for the American economy has also been downgraded sharply in recent months. While the Fed expects modest economic growth to return later this year, it won’t be enough to offset decline during the first half.

“If we can take strong and aggressive action, including the Fed’s actions to try to improve credit markets, I think we can break the back of this thing and that we will begin to see improvement in 2009,” noted Bernanke in a speech on February 19. “If we fail to take adequate actions, the situation would continue to deteriorate.”

Fed Forecast

The table notes the official Fed forecasts (say that three times quickly). The number ranges exclude the three highest and three lowest forecasts of the 16 sitting monetary policy makers (The Wall Street Journal).

Employment Pain

The unemployment rate is now expected to approach 8.8% later this year. While the forecast does see some decline in the jobless rate during 2010 and 2011, the rate is not expected to return to a more acceptable 5.0% level until 2012 at the earliest. By comparison, the U.S. unemployment rate, currently 7.6%, averaged 5.8% during 2008 and 4.6% during both 2006 and 2007.

The Fed’s forecast for inflation suggests it will remain under control, with a longer-term outlook ranging from 1.5% to 2.0%. Many economists would agree with this view, although there is a wide disparity between those forecasters who expect to see sharply higher inflation pressures in coming years versus those who see the most likely scenario being a Japanese-style deflation after 2010.

Solid Growth

Like the view of private sector economists, the Fed has delayed its growth expectations, not dismissed them. The Fed’s 2.5%-3.3% real growth expectation for 2010 would return the U.S. to more traditional growth norms.

The 3.8%-5.0% growth expectation for 2011 would be closer to economic boom conditions, likely driven by the impact of current massive fiscal policy pursuits (think Obama’s $787 billion stimulus program) and the Fed’s monetary stimulus, with the current 0.00%-0.25% federal funds rate the lowest ever. The issue of pent-up demand by millions of consumers also likely drives the Fed’s optimistic growth projections, once we (finally) get through 2009…

…didn’t we say that about 2008?

Lowest Since 1955

As noted before, the sharp decline in U.S. inflation pressures—tied to the plunge in oil and other commodity prices of the past eight months—gives the Fed “cover” or support for its aggressive monetary actions. The Consumer Price Index (CPI) over the most recent 12-month period was unchanged, the best performance in 53 years.

The CPI rose 0.3% in January. The increase was the first monthly rise in six months. The rise was actually comforting to those who fear that deflation, or falling prices, will be the Fed’s major challenge in coming years.

Featured in the 25 February 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from franckie under Creative Commons license at Flickr.com.