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Payroll Up, Bernanke Wants Deficit Down

Friday January 7th 2011

Wouldn’t it be nice if, just for once, when the unemployment rate fell and the number of jobs added to the Non Farm Payroll increased we could be in a celebratory mood instead of scowling in the shadows?
OK…I get it! Only 103,000 new non farm jobs were booked in December, somewhat less than the forecast median of 150,000. I guess given that the 12 days of Christmas are over all goodwill has vanished. Still there are reasons to be cheerful even though the Spring delights of Easter seem far, far away! Barely a mention has been given to the fact that employment in October and November rose more than initially estimated. There was also good news as the level of reported joblessness fell to 9.4%. This was down from November’s 9.8% and far better than the expected level of 9.7%.
If one tots up the complete picture of job creation in the year just gone one will see that 1.1m is the figure. This is the most since 2006. The jobless rate in 2010 averaged 9.6%, the highest since 1983 and a marked increase from the 9.3% recorded for 2009.  
In my previous notes I have pointed out the broad scope of new recruitment and given the US is dependent on private sector consumption it is gratifying to see that the retailers have their hiring hats on.  I am not alarmed and nor should you be either if the first signs of retail sector job creation is found within the discounters. The trend has to start somewhere and at least the signal is that retailers need more staff to provide service to an increasing number of consumers. Cash strapped customers are looking for bargains. Yes at last they are looking and buying. For much of 2009/2010 they didn’t even look. Dollar General Corp. Stated that it intends to open 625 new stores by the end of 2011 and that will require 6000 new employees.
Following the slimming down of its product base and a thorough overhaul of the corporate cost structure Ford Motor Co. claim’s to be the world’s most profitable automaker. (Hmm, better check that against Porsche!). Let’s be generous and say they are they most profitable volume car manufacturer…and guess what, Ford is hiring 1,800 workers in addition to pressing ahead with a factory refit in Kentucky worth $600m.  
Of course, one cannot be swept away on an unbridled wave of enthusiasm. I recognize that persistently high unemployment is a scare and uncertainty in the economy may well continue to pressure consumers and affect their spending. Look for the President to address the level of unemployment in his “State of the Union” on January 25th.
In economics we can often observe the fact that a dependent variable is not always able to move immediately after a fortuitous change in an independent variable. Currently unemployment is proving to be “sticky” above 9%. That was one reason why the President was keen, last December to sign an $858Bn bill extending all Bush-era tax cuts for 2 years. The bill also continues expanded unemployment insurance benefits through 2011 and cuts payrolls taxes by 2%.
This really is looking to be the time when the private sector has to start playing its hand as government payrolls decreased by 10,000 overall. State and local governments reduced employment by 20,000, while the federal government added 10,000 jobs. I can see why State payroll is lower as many of the 50 are facing severe budgetary constraints. However, that case applies to the federal government as well. Why did their payroll expand by 10,000?
Much of the ability of the private sector to step in with new employment positions will stem from a continuation of a soft rate policy from the Fed. Speaking to the Senate, just 1 hour after the jobs data, Fed Chairman, Ben Bernanke said it may take up to 4-5 years for the labour market to “normalize fully,” . Take that as confirmation that there are no changes in the Fed’s plans to pump $600Bn into the financial system. He added, “It’s about what we expected … If we continue at this pace we’re not going to see sustained declines in the unemployment rate….”
Are these comments, made today in a pre scripted speech signs that the Fed Chairman is trying to justify his deployment of QE2? I do not think he needs to justify himself. It is no exaggeration to say that without the vision of Ben Bernanke, not just the US economy but the global economy would be in an utter mess.
Here at Spotlight we are pleased to see is the Fed Chairman not pussy footing around the issue of national debt.
He is acutely aware of the need for the USA to get to grips with its budget deficit and so today he urged the lawmakers to draw up a “credible” fiscal plan to address issues that are long-term in nature, saying that “strong” actions are needed to control the nation’s debt. Bernanke said that the longer lawmakers wait to deal with the federal budget deficit, “the greater the risks and the more wrenching the inevitable changes to the budget will be.”
This week saw the start of at least 2 years of a dichotomy between the political power base of the White House and Congress. Incoming Republicans have promised to seek cuts to reduce a budget deficit that may widen to $1.34Tn for fiscal 2011 following shortfalls of $1.29Tn in fiscal 2010 and $1.42Tn in fiscal 2009. The difficulty in making progress is what will the White House and Congress agree on reducing? However, GOP officials know that they cannot just block every Presidential initiative. That will hand President Obama another 4 years on a plate as he would campaign on a platform against “Those do nothing Republicans”.
Alluding to economic growth, Bernanke said that “…The pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010…”.  The economy probably expanded at a 2.5% in Q4 cf. 2.6% in Q3 and 1.7% in Q2.
Jobs are coming back and the American economy will surprise to the upside. The consumer will come back, slowly at first, but we are well on the path to a recovery that is both lengthy and sustainable. Double Dip if you wish to, but this commentator says the economy is not for turning. Nor will the equity market. Look for 10%+ on the major US equity indices in 2011.
Stephen Pope
Managing Partner
January, 7th 2011

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