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Without Job Growth, Here Comes the “QE2”

Posted by Larry Doyle on August 6, 2010 9:46 AM |

This morning’s Unemployment Report further confirms that our economy remains burdened by our Sense on Cents description of ‘walking pneumonia.’  While this month’s report was decidedly weaker than expectations, once again we witness downward revisions to prior reports. Do you find it strange that more often than not much of the economic data released has displayed this tendency to have downward revisions to prior reports. Think the data is heavily massaged? You think?

Let’s navigate this morning’s report thanks to The Wall Street Journal’s Market Data page:

The July jobs report disappointed and weakness was largely in the government sector – and it was not all just temporary Census workers being laid off. But there were a few bright spots, including gains in wages, the workweek, and earnings. Overall payroll jobs in July declined 131,000 after falling a revised 221,000 in June and after a 432,000 boost in May. The decline in July was worse than the market forecast for a 125,000 decline. The May and June revisions were net down 97,000.

Turning to the household survey, the unemployment rate was unchanged at 9.5 percent in July.

For detail in the payroll numbers, the big weakness in July came from a 202,000 drop in government jobs, following a 252,000 fall the month before. Of the July government plunge, 143,000 came from a drop in Census Bureau payrolls.

Private nonfarm employment, which discounts the effects of hiring and firing temporary Census workers, accelerated moderately to a 71,000 increase, following a 31,000 gain in June. The latest number came in below the consensus expectation for a 100,000 boost in private payrolls. Improvement was evenly divided between the goods-producing and services-providing sectors. Good-producing rose 33,000 with manufacturing up 36,000, mining up 7,000, and construction down 11,000. Services-providing jobs rose 38,000 with strength led by health care, up 27, 000, and transportation & warehousing, up 12,000.

There were some notable positives in the latest employment report. Average hourly earnings improved to up 0.2 percent, following no change in June and matching the market projection for a 0.2 percent gain. The average workweek for all workers rose to 34.2 hours from 34.1 hours in June. Analysts had called for 34.1 hours.

What does it all mean? Our economy is continuing to adjust to the structural changes inhibiting real job growth. These changes are part and parcel of the ongoing deleveraging occurring in almost every corner of our economic landscape. qe2What should we expect from Washington? With little political will to pass another round of economic stimulus, Barack and friends will look for Uncle Ben Bernanke over at the Federal Reserve to take us for a cruise on the QE2. What’s that? Look for the Fed to launch another round of quantitative easing. In the process, our greenback will be under pressure, our interest rates will remain low, and equities and other credit sensitive sectors will likely continue to gain support from the dollar carry trade. All aboard the QE2 for another ride.


  • fred

    If your going to judge the effectiveness of the Fed you have to look at it’s dual mandates, inflation and employment.

    Ideal inflation, as measured by CPI, should be somewhere around 2-3%. Ideal employment, on the other hand, is probably best measured by targeting GDP growth. Presently, ideal stable inflation GDP growth is probably 3-4%.

    Based on this short hand analysis, the FED receives failing grades for both inflation and employment; however, growth targets for both inflation and employment are not too far off. Yes the unemployment rate nearly doubled, but the sweet spot on unemployment is probably somewhere around 7-8% not the artificially low 4-5%.

    My advice to the Fed, keep your focus on your mandates and stop trying to keep creditors of mtg securities whole, they made bad investments they should take the hit, only then we can we move on! Stimulus has reliquified the financials, lets get the mtg securities credit markets moving again, but repeat after me, fair value is not par!

    LD, you have an extensive backround in the mtg securities area, what do we have to do to clear the price and get these markets moving again without creating unmanagable dislocation?

  • LD


    You hit the nail on the head. Unless and until a market is allowed to clear, buyers will refrain from entering and truly committing capital. While our friends iN Washington believed they were helping the economy, a number of the programs to restart markets have only served to forestall the pain and anxiety.

    Let the markets work. How do they do that? Provide sufficient liquidity but do not provide backstops. The unintended consequences of the backstops are that banks and othre holders of securities will wait and wait and wait because Uncle Sam is holding their hand. Uncle Sam needs to step away from the markets and let the water find its own level.

    We do that and I think we might be surprised that the near term decline in prices would be met by buyers at the lower levels.Additionally, capitalism would be allowed to work and the moral hazards would no longer be violated.

    • fred

      The essence of Capitalism. Sufficient liquidity with no backstops. No more guarantees, cumbersome pork barrel regulatory changes, or artificially low interest rates.

      Individuals and businesses would have to utilize risk management rather than excessive risk taking. Prices would no longer reflect an artifical premium. Fully fuctioning auction markets would provide the necessary capital to effecient cos producing high demand products.

      Sounds great why don’t we try it?

  • divvytrader

    i can’t see what QE2 will look like that has a chance of being effective but won’t look so desperate that it won’t scare the public .

    i expect it collapses into nothing more than buying more GSE mbs and/or US Treasuries ( all at record low yields/prices already assuring huge losses down road to Fed ) which would fail just as miserably as QE1 failed .

    do you see a new form of QE that Benny can do that will be more effective ?

    Benny and the Feds like to stay non-partisan here but its going to destroy the Fed if they stay mum . They have to forcefully make the case that the government can N OT be jacking taxes on cap gains , dividends , and income on investors and small business while they scream for more stimulus . Its like raising additional sails on your boat to go faster and throwing out more anchors at same time . Insanity .

    At end of day , they must slash govt spending to show control of deficits and simultaneously keep Bush tax rates in place for an extended period and step away from housing beyond getting ready to handle more homeless people in coming years .

  • LD


    Do you think they are approaching their wits end? I do. The more they do, the less marginal impact it has. In fact, when might they realize that they should be getting out of the way and let the markets self correct. We will have some pain in the process but greater chance that REAL money comes back in.

    Until then the shell game they are trying to play will give the appearance that things are functioning when they’re not.

  • Brad

    Pissing into the wind…and getting it all over themselevs in the process.


    Who’s next?? Rham-bo??

  • fred

    Why QE will not work

    Even though the enemy has been correctly identified as deflation, the gov’t does not know how to effectively respond to it. Most economic theory and fiscal policy is effective in inflationary environments. In fact inflationary expectation is the major concern of policy makers over 90% of the time, but when debt levels become unservicable and when even AAA rated debt takes on the attributes of junk, watchout!

    Deflation responds to policy stimulus on a diminishing scale until it becomes nothing more than a political exercise of ignorance. As fast as the Fed pumps money into the economy it is saved or more accurately described, hoarded. Business doesn’t want to expand until unit revenue volume expands, banks dont want to lend because they fear they wont be repaid as debt covenants are no longer honored and collateral declines in value, business fears loss of access to necessary credit so it stockpiles cash. Consumers refrain from impulsive purchases because debt service has become more difficult, retirement nesteggs have been ravaged, and prices are now more negotiable.

    The goverment becomes larger and more intrusive in our daily lives because they are the only employer willing to hire and they have to at least appear as though they have a plan of attack, however useless and ineffective. Taxes will continue to rise, the Fed will continue to print, we will lose total control of our destiny as our currency depreciates and we become more and more reliant on our foreign creditors to provide our drug of choice, cash.

    Eventually, because we’ve printed so much of it and everyone has it, cash will become worthless and have no value. It must be replaced, everyone starts scrambling to spend while merchants still hesitantly honor Federal Reserve notes but they begin to raise prices as the marginal value of currency declines, hyperinflation takes root, the enemy has changed faces.

    As our free market innovators and business leaders become disenchanted and frustrated they will begin to withdraw from society and move to places like Aspen, Geneva or “the big island”. A leadership void will ensue and anarchy not far behind. Society will pay for not incorporating the lessons of Atlas Shrugged in our business schools.

    The antidote is capitalism, free markets and a government that enthusiastically supports these principals and punishes severely those that abuse the public trust.

    As mentioned previously in this blog, the most effective action the goverment can take is to facilitate the free market auction process by providing the neccessary liquidity to clear markets while simultaneously beginning the process of removing backstops and holding all violators of the public trust accountible starting immediately with “home squatters” who have chosen not to honor mortgage covenants or brokers who knowingly violated conventional mortgage standards and verification requirements.

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