The May employment data confirms a downshift in hiring that began in March. Increasing anxiety over an uncertain global economic environment is taking a toll on fledgling animal spirits. Higher gasoline prices earlier in the year, the crisis in the Eurozone, weaker growth in Asia and concern about the approaching “Fiscal Cliff” in the U.S. may all be weighing on business confidence despite the improvement to household balance sheets now apparent as consumer deleveraging winds down. A net of just 69,000 payroll jobs were added to the U.S. economy in May, well short of what is needed for a self-sustaining expansion. The weak May jobs numbers suggest that the slowdown in job creation that began in March is not just an echo of the strong job growth we had from December through February, but rather it represents a meaningful downshift in U.S. economic growth heading into the summer. The U.S. unemployment rate ticked up to 8.2 percent in May, the first monthly increase since June 2011. So far, the weak job growth since March looks like it is the result of a lack of hiring and not by an increase in firing.
According to the Congressional Budget Office the U.S. economy will run off a cliff in early 2013 if nothing is done to change current law. The so-called “Fiscal Cliff” represents the combination of large tax increases coming at the same time that the automatic enforcement procedures of the Budget Control Act of 2011 kick in. A budget sequester is now scheduled to take effect on January 2, 2013 as a result of the failure of the Super Committee to reach an agreement on deficit reduction last fall. The sequester represents a cut of $55 billion in federal defense spending plus another $55 billion cut in federal non-defense spending for 2013, plus other cuts scheduled to take effect after 2013. The budget sequester, taken in combination with the expiration of Bush and Obama era tax cuts at the end of this year, will result in a $607 billion reduction in the federal budget deficit in 2013. The CBO has determined that the fiscal tightening scheduled to occur in early 2013 will be enough to push the U.S. economy back into recession in the first half of 2013 unless current law is changed. New legislation is not likely to pass before the November election. So there is a limited window available to the lame duck congress after the 2012 election to soften the impact of the fiscal cliff by pruning back the budget sequester and the tax increases.
The weak job numbers plus Eurozone crisis, cooler Asia, and the Fiscal Cliff increase the odds of the Federal Reserve announcing new monetary policy actions at the upcoming June 19/20 FOMC meeting. Operation Twist is set to expire this month. The Fed may either extend Operation Twist or launch a new program of asset purchases.
Click here for the complete Comerica Economic Monthly for June 2012: USEconomicUpdate0612.