This release of the monthly US jobs report this morning was sandwiched between two historical events: the devastating hurricane that hit the country’s eastern seaboard and what many see as a particularly important presidential election. While the report will likely have little impact on undecided voters, it tells us a lot about the continuing vulnerability of the economy to external shocks such as Hurricane Sandy.
Let us start with the drivers of the headline numbers in the jobs report.
The labour market is benefiting from two inter-related factors: the stabilisation of the housing sector and more confident consumers. These are the main forces behind the strong job creation (171,000 in October, as well as the favorable revisions to prior months’ data).
Higher than expected job creation was accompanied by slight increases in both the participation rate and the employment-to-population ratio – both pointing to the gradual return to the labour force of less discouraged workers. As such, the slight upward tick in the unemployment rate to 7.9 per cent, calculated from a different data survey, is not a contradictory indicator.
But the better sentiment in housing and among consumers is not extending to the broader business community. There companies remain nervous about the outlook, including the much discussed “fiscal cliff” of tax increases and spending cuts scheduled for January unless political agreement can be reached. As such business hiring is sluggish, and there is little willingness to increase weekly wages.
Indeed, Friday’s report confirms the growing economic divergence between the household and the business sectors – one that will need to be reconciled one way or the other over the next few months.
Then there are the less encouraging, and also less visible, indicators of underlying trends in the labour market. Here, the report reminds us once more that developments with very harmful long-term effects are becoming more deeply embedded in the structure of the work force. Long-term joblessness remains a big problem. Indeed, the number of Americans out of a job for more than six months edged back above 5 million (or a staggering 40.6 per cent of the unemployed). Meanwhile, the unemployment rate among 16-19 year olds is stuck at an alarming 23.7 per cent; and that for older workers lacking a high school diploma rose almost a full percentage point to 12.2 per cent.
Look for the two presidential campaigns to try very hard to exaggerate the contrasting elements of Friday’s job report. But their opposing narratives will likely have little impact on undecided voters. Simply put, the job report is neither good enough nor bad enough to have a meaningful impact on Tuesday’s election.
How about the outlook for future job reports? They will be subject to the intensifying tug of war between household and business sentiment. They will also be whipsawed by Hurricane Sandy in a manner that we need to understand better.
In the short-term, Sandy’s disruption of economic activity and its negative wealth effects will weaken job creation. This should be recouped over the longer-term as reconstruction proceeds and delayed activity is made up.
However this effect will only be partial given America’s limited and declining macroeconomic policy flexibility. Compared to previous natural disasters, the compensating factors of reconstruction may not arrive as soon as expected, or be as comprehensive in reach for two reasons:
Most federal, state and local budgets are already quite stretched, undermining their ability to assist uninsured businesses and households, which would be critical for limiting the duration of the immediate blow to economic activity. Meanwhile, there is little that monetary policy can do at this stage. Interest rates are already floored at zero, and with considerable forward guidance; and the impact of balance sheet expansion is declining.
Overall, Friday’s jobs report is consistent with what now should be the widely-accepted view of the US economy – it continues to heal on account of certain segments, in particular households and housing, but is yet to attain “escape velocity.” As such, the risk of longer-term structural impediments continues to be too high, while the sensitivity to disruptive domestic and external headwinds – and certainly hurricanes – remains uncomfortably large.
The writer is the chief executive and co-chief investment officer of Pimco.