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Jobs Report: Market Looks to The Fed For More Distortions

James Groth
September 2, 2011, 7:00pm

There are many disappointing aspects to today’s job report, but the reaction that has ensued is borderline demoralizing. Here are some headlines from today:

·        “Job Paralysis Raises Odds of Fed Action” – WSJ

·        “Fed’s likely Response to Bad Jobs Report: Operation Twist” - CNBC

·        “Gold Surges as Weak Jobs Data Fuels Expectations For More Quantitative Easing” – Forbes

·        “US Dollar Drops as Dismal Jobs Data Fuels Talk of QE3” – Reuters

The action in the markets today correspondingly was brutal. The Dow Jones Industrial Average finished down 253 points and the S&P 500 closed 2.5 percent lower. The Federal Reserve is guaranteed to hold on their exit strategy at this point and probably to engage in further easing in the near future. Options being thrown around are for the Fed to lower interest on excess reserves, change the duration of their enormous treasury portfolio by purchasing longer dated treasuries in exchange for shorter term notes, and various forms of a third quantitative easing program. Lowering interest on excess reserves and changing the duration of the Fed’s portfolio—the so-called operation twist—doesn’t expand the Fed’s already bloated balance sheet. But another QE most certainly does, and given the following two charts, it looks like more expansive monetary policy is on the way.

The first chart is today’s intraday spot gold futures:

The next chart shows three days of the 10-year Treasury note:

Gold is up about 3 percent today near its high of $1,911, and the yield on the 10-year Treasury note broke below 2 percent. Indications from these two markets point quite clearly toward further easing by the Federal Reserve.

But will more easing help? And have the previous programs possibly set us up for harm? One of the aspects of today’s job report that wasn’t much mentioned, but is considerably worrisome, is the continuing decline in year-on-year hourly earnings as can be seen in the chart below (seasonally adjusted):

Declines in year-on-year hourly earnings are typically reversed with economic growth. Real economic growth is typically foreshadowed by a rise in the stock market which leads this reversal. About a six month lag occurs before hourly earnings begin to grow back to normal levels following both the rising stock market and the growing economy. The rise in hourly earnings lags slightly the stock market, but it leads a decline in the unemployment rate. Note this occurrence in 2003. Obviously from the chart, however, that did not occur this time around even though the stock market has risen considerably for more than two years. Year-on-year hourly earnings should have begun to rise a while ago.

Hourly earnings are not growing at a pace reminiscent of a recovery despite what the stock market is foreshadowing. Whether or not the Fed’s actions have built in a serious premium into the stock market is of course the million-dollar question, but what’s troubling about this break in trend is that in looking at the data from the falling hourly earnings, now would be about the right time for recovery. While that may sound encouraging, it most likely will not occur anytime soon, and that premium will have to fall before a recovery can begin. That means more time and more stagnation. If the political trend continues, that will bring more fiscal stimulus coupled with more monetary easing. It’s the opposite equation necessary for recovery. A recovery that should have been occurring right about now.

Also see Anthony Randazzo's post on this blog from earlier today regarding the employment situation.

James Groth is Research Associate

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