I was surprised with last week’s Non-farm Payroll numbers. They were much hotter than I expected. My own number was (as usual) in the bear camp. I was looking for a flat to down number. I don’t really have much faith in the numbers we are getting. That said, the data showed a lot of new jobs were created. From David Rosenberg yesterday:
The raw data showed that 919,000 payrolls were somehow created in October, which therefore would have made this the second strongest October in the last 11 years — in October 2009, the tally in the raw nonfarm payroll data was 646,000 even though the economy then was accelerating at a 5% annual rate. The data bear no resemblance to the reality of an economy barely growing at all in real per capita terms.
I share David’s view that the numbers do not add up given the broader macro picture. So I was left scratching my head. I still am, but I would like to add something to the discussion and pose a question. Two recent emails:
A new address for me. I woke up 6 weeks ago and said fuck it. Put my stuff in storage and moved to Houston. I got a place to stay and a job. So I am starting over, again.
Ian is a plumber who worked for a big construction company south of Tampa Fl. Steady work as Fl. boomed. Then he got laid off and maxed out unemployment waiting for a recovery that did not happen. He scrambled for cash work to stay alive. When the benefits ran out the only option was to move to where there was work.
Simon got a job after nearly two years. For years he helped people to get a mortgage. Now he is working for a company that has customers who can’t pay their mortgage. He doesn’t make as much as he used to but at least he has benefits.
Do these comments mean anything? Not really. Two stories in the wind of 130mm. These two people were motivated to change what they were doing when the crunch came. The crunch was the end to EU benefits.
Over the next few months close to 5 million people will be looking at the end of their checks. There will be a range of outcomes as this happens. Some will not find work and their status will be tenuous. Others will figure out how to get by with less and find work off the books. Still others will take jobs that are available even if they have paychecks well less than they did two years ago. This has the potential to create some tremendous “noise” in the economy. It also might create some head fakes in the markets.
Consider a scenario where the end of EU pushed a good number of people back into the workforce over the next few months. Yes, they would be taking jobs at the Wal-Mart and Duncan doughnuts, but they show up as newly employed. On NFP Friday the only thing that counts is the top line number. I pose the question: What happens if we get hot numbers that average 250k for the next three months as the EU issue sorts itself out?
My first thought is that this could be an explosiveprovem combination with Mr. Bernanke’s QE. If just 20% of the 5mm find something to do for a paycheck over the next six months while our boy Ben is pouring gas on the fire the economy will flare up for a bit. An improvement in the jobs picture will be very noticeable in the bond market. It could be the basis of a hiccup in all manner of commodities prices. The most significant would be in the cost of energy, food and gold. Should things work out like this it would shine a terrible light on QE. The policy would be indefensible given the backdrop of an improved labour picture and a sharp ramp up of consumer prices. Bernanke would be forced by the markets and the public to back off and moderate the QE program. He has said they would fine tune QE as information on the economy becomes available. Most people read that to mean that QE-3 was a sure thing. It could also mean that he would back off if there is demonstrable evidence that QE was not really necessary.
But here is the real world scenario. Forget about some noise we may get from a few months of distorted employment numbers. What is really happening is that a very significant number of the 5mm will be hitting the skids in slow motion. Their consumption will fall substantially and we will probably see an increase in food stamps at the same time payrolls are rising. Those that do get a job will have after-tax income not too far from the unemployment checks they were getting. Net-net disposable income will be in decline. In this outcome the best that one could hope for is a few years of growth a point or so above zero.
There are many possible paths in the future. Something along these lines is just one. Should something like this happen we would find ourselves sometime this spring or summer with a busted and disgraced QE effort. ZIRP might still exist but the Fed’s ability to push the economy further using monetary policy will be exhausted. I can’t imagine that QE will end quietly. It will go out with a bang. When it is gone it will not return for a long while.
Bernanke got head faked a few months ago when Greenspan said that the economy had, “Hit an invisible wall”. He over reacted and teed up QE as a result. Once it was out there it was impossible for him to back off, even though the economic evidence suggested caution. As a result, we get a half assed QE compromise that will accomplish little but to stoke some commodities fires.
QE-1 was an emergency measure that achieved the objective of stabilizing the economy during the “emergency” of two years ago. We may very well find ourselves in another emergency later in 2011. The economy may need a shot in the arm. But the botched introduction of QE-2 will make it impossible for Bernanke to roll out a sequel.
Bernanke is an academic. He has no experience in markets and therefore has no sense of market timing. He completely blew the timing on this one. QE-2 will go down in history as a failed policy effort that backfired. When/if we need QE in the future it will not be available as a policy tool. Bernanke’s botch job has tied the Fed’s hands for at least a decade.