Weak Jobs News, So Where’s The Stimulus?

The payroll processing company ADP released its regular report on payroll growth today. The news was not good. The private sector payrolls covered by ADP shed 39,000 jobs in September. Anyway you cut it this is a weak performance. The consensus amongst Wall Street analysts had been an expectation of poor growth, by about 20,000, so an outright decline like this is something of a shock. Clearly the summer doldrums took their toll.

The decline was also widespread which is a blow to those who argue we are facing some sort of structural employment problems. Usually such a problem manifests itself as a lopsided jobs market: some industries growing while others are fading. The ADP data has weakness everywhere except in services, and even there the addition to payrolls was a paltry 6,000. Meanwhile manufacturing lost 17,000, which along with the weaker reports coming from the Institute of Supply Management portray an economy stuttering along rather than in strong recovery mode. The latest ISM report had their manufacturing index at 54.5% down from its 2010 peak of 65.9% back in January. While any reading over 50.0% is good – it means that over half of all companies are expanding activity – the trend is disturbing. There is no momentum we can look to as the driving force for growth.

The ADP jobs data simply confirms this weak trend.

We have now reached a pivotal moment. Either we take up the challenge and do what is necessary to fix our ills, or we wallow in the morass. I suspect we will choose to wallow. As a nation we don’t have the courage to deal with this problem. Or at least the current signs are that we don’t.

There is a weariness in our policy elite that is almost fatalistic. They simply cannot bring themselves to convince the public of the effort required. They elide, dodge, and confuse instead of leading.

This weakness translates into inaction or inadequate action. That, in turn, fails to solve the problem and is interpreted as confirmation that our policy choices are exhausted. That leads to ennui and a feeling of powerlessness. We have lost our will to fight.

The problem is this: we have two weapons to use. Monetary policy, and fiscal policy. Monetary policy is the preferred option, as it has been for decades. That means using lower interest rates to boost borrowing and thus consumption and the economy overall. The problem as we all know is that rates are now so low we have nowhere to go. It’s worse in Japan, where just this week rates were dropped to 0.1%. Even that is thought not to be enough. Here we have marginally more room left, but given the size of the problem there is no way we can reduce rates to have sufficient impact. Using the rule of thumb measure I have described before, we need rates at about -5.0% to get traction against the current malaise. That’s not possible. So we are stuck. As they say in the trade we have hit the “zero bound” where normal policy fails.

This leaves the Fed with little option but to use abnormal and creative ways to pump liquidity into the economy.

The term used to describe these unusual policies is “quantitative easing”. This policy involves the Fed buying securities in the open market and holding them on its balance sheet. The idea being that the cash they use to buy the securities adds to the money available in the economy.

But even this is beginning to fade in its effect.

The problem is that when the Fed buys US bonds and other low risk securities, which is its first choice, it is simply substituting one risk free instrument, cash, for another. It isn’t shifting the yield curve, and it isn’t shifting the propensity to save. The reason for this is that the economy is already awash with liquidity. People are hoarding cash. Giving them more doesn’t alter their desire to hoard. Taking their US bonds and giving them cash simply means they hoard cash instead of risk free bonds which most investors regard as equivalent to cash anyway.

One way around this would be for the Fed to get even more funky and buy high risk assets. This would reduce the risk profile of investor portfolios and presumably allow them to hold less cash as a risk hedge. Look for the Fed to play this game, by purchasing commercial paper, medium term paper of various sorts and maybe even some more distressed assets. Whether this will work is open to doubt. The clouds hanging over the economy are dark enough that even this effort may fail. Or at least it may not prove to be as effective as we need.

Besides, as I have reported here before, there is an intense debate going on within the Fed as to whether it needs to take any action at all. So looking for leadership there might be a fool’s game.

That leaves us with one reliable approach: fiscal policy. The problem here is that the country is now gun shy of the debt needed to make this work. We have used one round of moderate stimulus which was hobbled by its poor design and slow implementation. Far too much of it was in the form of tax cuts which are well known to be ineffective as a stimulant. Political concessions to ameliorate opposition further weakened that effort. So while it was an unqualified success – much to the chagrin of the opposition – is was barley enough to slow the fall, much less induce a recovery.

It was a massive national failure of will. The price for which we are now paying.

But fiscal policy remains our only hope. We need to summon up the fortitude to do the right thing and pile on the deficit until the economy hums again. this implies running up the debt to GDP ratio to levels we have not seen in peacetime. Then again, we have not had to deal with a crisis like this since the Depression, so it is not unreasonable for our response to break records.

For those of you who fear the repercussions of that debt let me repeat my warning: the alternative is worse. The cost of the additional debt has to be weighed against the amount of lost wealth and the damage to our businesses and households. Since we are now operating at about 6% below our potential, that loss of wealth is accumulating at an alarming rate. Issuing enough debt to get us back on track, and thus to close that gap, is a worthwhile investment in our future. Not to do so is to succumb to a false short term perspective, and to fail to understand that we have the power to stop the rot.

I won’t hold my breath of course.