A Good Jobs Report

On Friday morning, we learned non-farm payrolls jumped 255,000 in July.   Shortly thereafter came numerous media suggestions that the FED will now raise short-term rates.

I don’t think so.  Here is why…at least not due to the employment numbers.

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Why You Should Care:  Short term interest rates impact your credit card rates, bank debt tied to LIBOR, car loans, etc.   A FED rate increase may cost you money.

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Taking Action:  Stay the course…US short term interest rates are not going up just yet.

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The Blog:  Is the FED tempted to raise rates now?   Sure.  But they won’t.  Why?

Central banks around the globe raises rates when they feel their economy is beginning to overheat.   This simple monetary tool makes borrowing more expensive – for business and individuals – thereby (in theory) causing both to borrow less.

But our economy is not overheating.  In fact, if anything, it’s lukewarm.   Barely simmering.   Here are the facts:

1. GDP:  For the first 1/2 of the year, GDP is growing at a meager 1.0%.    Lukewarm.
2. Civilian Noninstitutional Population:  You may recall this is the measure of the number of Americans – over the age of 16 – who could potentially work.  In July, this number increased to 253,620,000 – an increase of 223 thousand.   Which means the job increases of about 255 thousand barely covered the new entrants into the US labor force. Lukewarm.
3. LMCI:  The Labor Market Conditions Index showed some directional improvement in June, but the index is still negative – and has been every month this year.  June was a negative (-1.9).   Lukewarm. 
4. Labor Force Participation:   At 62.8%, a significant portion of the potential labor force remains uninterested in seeking a job.   While there are numerous potential causes for this issue, there don’t seem to be many solutions.  Lukewarm.
5. U-6:  This is what I consider the be the true measure of unemployment.   The July reading of 9.7% remains stubbornly high.   In fact, it’s .1% higher than last month.  Lukewarm.
6. Inflation:   The FED has a 2% target.  A target we’re unlikely to hit in the near future.  Per the BEA, the most recent readings for the PCE is 0.9%.   And it’s been stuck below 1.0% this entire year!  OK…ok…January was 1.1%.  Sorry for the hyperbole.  Clearly, the PCE is going nowhere…which is somewhat surprising in light of the significant ‘housing’ expense increases we’ve seen this year.   Lukewarm.
7. Labor Productivity and Unit Labor Costs:  Productivity measures how much ‘stuff’ is generated by a consistent ‘unit’ of input.  In the first quarter of this year, 3 of the 5 measures tracked by the BLS were negative.   Not good.   And 4 of the 5 measures for ‘unit labor costs’ were up significantly.   Lukewarm.
8. Corporate Profits:  After peaking in 2014:Q4, corporate profits have been declining.  We saw an up-tick the past quarter, but we’re still more than 11% lower than the high water mark.  More concerning to me, as corporate debt levels are up significantly due to ultra low interest rates, a short-term rate increase would weaken corporate profits even further.   Lukewarm.
9. Long Term Rates Around the Globe:  Low, low low.   This is a major issue and concern.   Rising US short-term rates might introduce a whole new set of problems into an already complex marketplace.  Lukewarm.
10. Asymmetric Risk:  The FED has to consider its two options carefully.   It only has two.  Raise rates…or leave them alone.   Looking thru this extremely complex and murky US and global economic soup, there are invisible and translucent risks everywhere.   But in the absence of inflation, or even the expectation of inflation, the FED understands the risks of raising short-term rates are far greater than the risk of doing nothing.  At least for now.  Lukewarm.

Finally, consider this:   An immediate market reaction to a FED rate increase will be a lift in the value of the US dollar against other currencies.  This makes our exports more expensive, thereby negatively impacting our GDP.

Nothing is overheating here.   As I’ve said in prior blogs, our economy is on simmer.

• Terry Liebman