The official Bureau of Labor Statistics count of payroll jobs created in June was a disappointing 80,000, and the unemployment rate was unchanged at 8.2 percent. The June jobs data confirms that the slowdown in hiring, first visible in March, has extended into the summer. Several factors have been blamed for the slowdown, including: (1) favorable weather early in the year which pulled economic activity forward, (2) high gasoline prices earlier in the year, (3) a weaker global macroeconomic environment with Europe in crisis and Asia cooler, (4) the approaching Fiscal Cliff, and (5) a structural change in labor market dynamics. It is impossible to say definitively which factor or factors are holding down job growth, but it is fair to say that it looks like a little bit of everything. The danger that the U.S. economy now faces is a loss of momentum in the parts of the economy that have been noticeably improving, namely, energy, manufacturing, residential real estate, and automotive. While the likelihood of a collapse in demand for these sectors now looks small, the likelihood of ongoing strong growth also looks smaller. So far, lack of hiring has not evolved into broad-based firing, but the longer we stay in weak hiring mode the more likely it is that firing increases. Given the headwinds from Europe and Asia, and the approaching Fiscal Cliff, plus the loss of momentum within the U.S. economy, it looks like the rest of this year will feel like more of the same…a sluggish march toward the Fiscal Cliff.
We may yet see more aggressive monetary policy by the Federal Reserve this year, in the form of quantitative easing, but that is by no means a sure thing. The Fed is already engaged in extraordinary monetary policy with the pledge to keep the fed funds rate near zero through at least the end of 2014, and with the extension of Operation Twist through the remainder of this year. However, neither program is expected to inject new confidence into employers. Also, the closer we get to Election Day the more the Fed will be exposed to criticism about political motivations if they engage in additional monetary policy actions. An increasing trend in the unemployment rate would certainly catch the Fed’s attention, boosting the likelihood of QE3, but we are not there yet.
The Asia cool-down is not independent of the Euro-zone crisis. Ongoing demand destruction in Europe will remain a downside risk for Chinese exports through the second half of 2012. With inflation under control after peaking in 2011, the policy focus in China is now on stimulus. On the monetary side, the Peoples Bank of China has room for more interest rate cuts. Unlike the U.S., China is not stuck near the zero interest rate bound and so rate cuts there will have a bigger positive impact on growth. The PBOC also has room to lower bank reserve requirements which can amplify the effect of lower interest rates. Also, more fiscal stimulus is expected. Again, unlike the U.S., China has room to increase spending on infrastructure without damaging its long-term fiscal outlook. The suspect quality of economic data from China makes point forecasts a faith-based exercise. The consensus among China trackers is still for a soft-landing for China GDP.
Click here for the complete July 2012 Comerica Economic Update, including the latest macroeconomic forecast: USEconomicUpdate0712.