Editor’s note: The U.S. economy added a disappointing 38,000 jobs last month, the smallest number in more than five years, according to seasonally adjusted figures from the Bureau of Labor Statistics. The weak numbers suggest a June interest rate hike – which the Federal Reserve had recently hinted is possible – is now off the table. We asked two of our experts to give us their quick takes on the report.
We need a credible plan for the economy
The US presidential selection process is well underway, and yet there has been no coherent discussion of fiscal policy. In part, this is because it does not appear particularly urgent. The US deficit peaked in 2009 at 10.1% of GDP. Last year it stood at what for most OECD countries an enviable 2.6%. This year and next, it is forecast by private sector economists to reach 2.9%.
Unfortunately, even though the U.S. is bountiful and the world’s biggest individual exporter of food, millions of Americans actually are not.
Each year the Department of Agriculture runs a nationwide survey to determine how many people go hungry. The latest figures show almost 6 percent of households – about 18 million people – are consistently not getting enough to eat. Another 8 percent – 30 million people – have occasional problems feeding themselves.
The US non-farm payroll report typically dominates the first Friday a new month. In recent years, it has become among the most important economic reports globally. Not today.
The October employment data convinced many that a Fed hike in December is a strong probability. On top of the strongest average hourly earnings in several years, the US reported a record increase in September consumer credit. Earlier last week, the US reported the stronger than expected October auto sales. It was the second month in excess of 18 mln vehicles at an annualized rate. This happened two other times since 1990.
We just learned America’s rental affordability crisis is as bad as it has ever been. Unfortunately, it is about to get a whole lot worse. The American Community Survey for 2014, released a few weeks ago, found that the number of renters paying 30% or more of their income on housing – the standard benchmark for what’s considered affordable – reached a new record high of 20.7 million households, up nearly a half-million from the year before. Despite the improving economy, the increase was nearly five times bigger than last year’s gain.
Two developments make a shutdown of the US government on October 1 less likely. First, the outgoing Speaker of the House made it clear he is determined to avoid the government shutdown, and with his resignation (as of the end of October), he is freed from some of the political constraints.
The big question these days is when the Federal Reserve will finally raise its target interest rate for the first time in almost a decade. Its monetary policy committee is meeting this week to decide whether to do just that.
Unfortunately, this is the wrong question. Whether the Fed moves this week or next month will make little difference over time. If it takes too small a step now – or none at all – it can take a bigger step later.
The US dollar and equity futures responded favorably to the stronger than expected durable goods orders. The sizable upward revision in the June shipments (from 0.3% to 0.9%) underscores expectations of an upward revision to Q2 GDP when reported tomorrow.
The US dollar began the new week bid in Asia, but surrendered most of those initial gains before the start of the European session. The lack of fresh news has seen the greenback drift higher in Europe, perhaps waiting for fresh direction from North America.
The US dollar is set to close the week on a strong note. The relatively constructive data is boosting confidence that the Federal Reserve will have the opportunity it has been looking for to begin, however gradual, the normalization of monetary policy. At the same time, the Greece impasse remains, and German Chancellor Merkel has weighed in suggesting that too strong of a euro impedes reforms in Spain and Ireland. This, of course, leads to fresh selling.
Recently the bond rating company Moody’s Investor Service cut their ranking of Chicago to junk status. The move ticked off a lot of people in the Windy City who think Moody’s overstated the case. I agree that Moody’s is wrong… not because they went too far, but because they didn’t go far enough. Chicago is not close to bankrupt. It’s completely bankrupt. People are just afraid to say this out loud.
The US dollar is enjoying firmer tone as the week winds down. It is up against all the major currencies but the Norwegian krone today. This trims the loss for the week. In fact, the roughly 0.7% decline of the New Zealand dollar today, making it the weakest of the majors, is enough to turn it lower on the week. Fonterra lowered its 12-month projections of dairy supply, especially whole milk powder.
As I read the news and watch the markets, I am struck by the yawning difference between what is going on with the economy and what is happening with equities.
I know the worn out arguments.
People are buying stocks because they do not have many choices. That’s fair, to some extent. The return on stocks (dividends, expected earnings growth) is higher than the interest paid on bonds.
The year 2014 was a great year for the United States economy. However, the year 2015 hasn't been the same. While we are still not in dire straits, we're not seeing the consumer spending and job growth that we saw last year. While many experts seem to be brushing the bad data off as healthy trends, I beg to differ. Unfortunately, I think that we may be looking the next major market correction dead in the face if things keep going in the direction they are. Here's why...