The Fed’s efforts to stimulate faster job growth by printing money have been futile. By now, it’s clear to everybody, even the Fed, that QE does absolutely nothing to stimulate economic growth while fomenting bubbles in housing and stock prices. The Fed will disingenuously use steady job growth as an excuse to begin cutting back on QE soon. The real reason lies elsewhere. The Fed is worried about the expansion of these asset bubbles. If they’re not worried, they are even more insane than I thought.
The BLS reported a seasonally adjusted (SA) gain of 162,000 in July nonfarm payrolls Friday, missing the consensus estimates of around 175,000 from surveys of economists by mainstream media organizations. We had an inkling of this from the real time Federal tax withholding data in July.
The trend of the actual, not seasonally adjusted data (NSA), has gone in a virtually straight line at near +1.6% for 21 months. That should make forecasting easy but most economists with their fancy econometric models still miss. They usually adjust their forecasts in the opposite direction from their miss in the prior period.
The seasonally adjusted data for May and June were revised down. Nobody cares about the revisions, however. Traders only care about this first guesstimate, which the BLS tells us has a margin of error of +/- 90,000. Both the economists’ guesstimates and subsequent revisions are always within the margin of error.
The fact that the market often reacts strongly to the latest month’s figure is just another example of the absurd fixation with reacting to data that’s never correct on the first release and ultimately doesn’t matter anyway. The market responds to money, not data, and there’s too much money around. That causes asset bubbles to grow. It’s an alternative to conventional inflation that mainstream conomists refuse to recognize. They just cover their eyes and ears and scream “Shut up! Shut up! Shut up!” to block out the reality.
The SA headline number compares with a decline of 1.113 million in the actual, not seasonally adjusted number (NSA). Declining employment is normal in July. Since this number is not seasonally finagled we must look at past years to judge whether it’s good, so-so, or lousy. Last year the July NSA drop was 1.188 million and the year before 1.272 million. The 10 year average decrease for July from 2003 to 2012 was 1.303 million. This year’s number was significantly better than the average, as well as better than 2011 and 2012. There’s an issue of whether full time jobs are growing or the growth is just in part time jobs. I’ll look at that in a subsequent post.
The NSA number is not massaged to represent an idealized curve with seasonal tendencies filtered out. The NSA data was again smack on the trend of the past year. Economists apparently have not mastered the arcane art of straight line trend extrapolation. The number of jobs has been growing at virtually the same rate for the past 21 months, around 1.6% per year, give or take a tenth.
QE 3-4, which was announced in September 2012, with the cash flow starting in November, has not caused any increase in the growth rate. There’s absolutely no difference in the growth rate between the QE pause period in 2012 and since QE3-4 started. The evidence is incontrovertible. QE has not contributed to jobs growth. There is no trickle down. Bernanke’s cherished theory, which he espoused in his 2010 oped in the Washington Post justifying QE2, is a sham.
While QE has not spurred jobs growth, the same can’t be said for what the Fed’s shenanigans have done for stocks and housing prices, which have surged out of all proportion to the rate of jobs growth. While QE grew by 27% in the last year, jobs have grown by 1.7%, matching the GDP growth rate, housing prices are up 13.5% and stocks are up 22%. Bernanke got the stock market gains he wanted and expected. He just didn’t get the trickle down he said he expected. The idea that rising stock prices lift the economy is another of Bernanke’s false notions that will eventually result in another crash, just not yet.
The government says that the size of the labor force shrank in July and that the unemployment rate dropped, so that unlike June when there was no progress, there was some progress toward the Fed’s target of 6.5% unemployment. There are other reasons which will probably cause them to cut back on QE sooner rather than later.
Central banks cannot cause economic growth to track the inflation of financial asset prices. Based on their recent trial balloons on the Taper, it seems that that message is finally beginning to sink in with the FOMC. Those trial balloons have been off again, on again. This week they’re on again with Goldman Sacks and Pillages Inc. predicting a September Taper, and Dallas Fed President Fisher also saying they’re ready to taper. All of the back and forth talk is designed to anesthetize the market so that it has minimal reaction when it finally happens.
I expect a small taper in September. However, there will still be too much excess liquidity created each month until the level of QE falls well below the amount of new Treasury supply coming to market each month. That will cause even greater instability down the road.
Note: The numbers above come from the BLS the Current Employment Statistics Survey or CES, a survey of business establishments. The BLS also does a survey of households. The household survey or CPS — Current Population Survey– sometimes tells a different story from the establishment survey. It’s also important in that it breaks out full time employment from total employment so that we can analyze that important metric separately. That story continues in Part 2 of this report which will be posted later.
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