Bill Cheney
Bill Cheney
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With today's report, the odds of a negative quarter of GDP growth have increased substantially, and the chances of a full-fledged recession just went up -- perhaps approaching 50-50. Job losses cut directly into the spending of the newly unemployed, and indirectly tend to have a very real impact on the confidence of those who are still working. If demand falls, firms will lay off more employees, and the downward spiral could put us over the edge into a bona fide recession before the Fed's actions can take effect.
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The unemployment situation won't truly improve until businesses increase hiring a lot more than they did in February. It takes roughly 150,000 new jobs per month just to keep the unemployment rate steady, as population growth increases the work force.
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The moment they think there are jobs there, they'll be out looking and the employment rate will start heading up again. I think that's on the whole a good sign at this point in the cycle.
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Looking ahead beyond the current gloom, there is a serious risk that we already have inflationary forces baked into the system. By late spring, the Fed could be cranking up interest rates even faster than they cut them.
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I'd say there's only a 25 percent chance of a rate hike in June even. Even with another strong jobs report Friday, they'll want to have something that looks more definitely like a trend.
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The rise in wages of 6 cents might cause jitters, but wage inflation is less of a worry now, especially with productivity still growing at a healthy clip. As the economy slows, the unemployment rate will continue to inch up and wage pressures should ease further.
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Sooner or later rates will have to come back up to at least a 'neutral' level. But for now they've got the monetary policy lever just about where they want it, and it makes sense to do as little as possible for as long as possible.
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It would be kind of like when they put through a substantial emergency rate cut when the market crashed in 1987. I don't think it is evidence of panic to treat what happened yesterday as an emergency. It's an emergency on many levels.
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It takes something on the order of 150,000 new jobs a month to absorb the natural increase in the labor force. As long as we keep getting smaller positive numbers than that, the unemployment rate should be trending up rather than down.
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At this point I am guessing that the Fed is pretty committed to raising rates in January but after that all bets are off.
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This is kind of number that will let the Fed relax and keep cutting rates as long as they see a need.
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Santa's workshop will be operating pretty much at full capacity. There just probably won't be much elf overtime.
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If unemployment sticks at about 6.0 percent and starts coming down, the Fed will probably feel it has to start tightening fairly soon.
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Inflation is a potential risk. It's not a reality yet.