Comerica Economic Weekly

After increasing in July, job growth in August fell back closer to the weak Q2 average. The official Bureau of Labor Statistics job report for August showed a less-than-expected gain of 96,000 jobs. The disappointing numbers for August, which include negative revisions for June and July, add weight to the case for more monetary policy action by the Federal Reserve. Optically less bad in today’s BLS report was the decline in the unemployment rate by two-tenths to 8.1 percent. However, as is sometimes the case, the unemployment rate dipped for the wrong reason in August as the labor force shrank by 368,000 workers. This pulled down the overall labor force participation rate to 63.5 percent, representing the lowest percentage of working age adults participating in the labor force since the late 1970s. The policy spigots are opening worldwide as the drag from cooler global demand is increasingly visible. Yesterday, the European Central Bank announced a new program of quantitative easing. The ECB will purchase European sovereign bonds with maturities between one and three years with the goal of stabilizing interest rates in distressed countries. There is no theoretical limit to this program and so, it represents a firm backstop to elevated European sovereign yields. The program will be fully sterilized, meaning that it will not increase the money supply of the European Union and so, will not contribute to inflation nor tilt foreign exchange markets. The program is both a carrot and a stick for countries struggling to adhere to fiscal rebalancing. Noncompliance by EU member countries with budget agreements will result in a suspension of the purchases of that country’s bonds by the ECB, potentially exposing them to unsustainable sovereign debt payments. This action by the ECB does not directly address the deepening recession in Europe, nor does it solve the banking crisis nor clear the way for a political process that unifies fiscal policy in the European Union. What it does is buy time for other policy actions and agreements and brings the distressed peripheral countries a step back from a potential exit of the EU. China has announced major new fiscal stimulus in the form of 60 new infrastructure projects representing a total of $150 billion.  U.S. auto sales for August beat expectations, increasing to a 14.5 million unit rate. This is a moderate gain from July’s 14.1 million units, but is still within the range set by the January and February sales numbers. The ISM non-manufacturing survey for August showed an increase to 53.7 percent, indicating expansion in the service sector. The ISM’s manufacturing survey for August showed a small decrease to 49.6, essentially unchanged over the last three months. The string of sub-50 readings for the manufacturing survey confirms cooling conditions for U.S. manufacturing, dragged down in part by weak global demand. The new export orders component of the ISM manufacturing survey has averaged a weak 47.0 for the past three months.

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