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It's a Long Way to Tipperary
By: Dr. charles Lieberman, Chief Investment Officer
Date: 7/6/2010
Employment growth is disappointing, but the economy's a long way from another decline. Hiring is consistent with 3% to 4% GDP growth. That's barely respectable. It is insufficient to bring down unemployment, although it is certainly far from a new contraction. Prevailing conditions render it highly unlikely that the Fed would hike interest rates anytime soon, at least until the economy builds up a solid head of steam. Similarly, it would be premature for fiscal policy to shift it's focus from promoting recovery to reducing deficits.
Job growth, excluding census workers, has averaged almost exactly 100,000 net new hires monthly this year. That's consistent with economic growth of 3% to 4% at an annual rate, but slightly less than underlying growth in our labor force. Thus, unemployment should change very little with this growth rate, which is unsatisfactory for an economy recently emerged from recession.
Bears suggest that the economy is about to relapse into a double dip recession, although the data are inconsistent with this possibility. Some suggest that consumer incomes and spending are entirely dependent on government transfers. This is factually incorrect. Personal income has increased at a 4.4% annual rate in 2010. Wage and salary income has done slightly better at 4.8%. Net of transfer payments (to exclude unemployment insurance and other transfer payments to identify how the private economy is performing), real personal income has increased at a 3.5% pace this year, right smack in the middle of the estimated range for GDP growth based entirely on job growth and productivity gains. So the economy is growing, just not fast enough.
Policymakers will not be satisfied with the progress made towards economic recovery once they return from their July 4th recess and evaluate the latest economic reports. Left alone, the economy is likely to gradually build momentum and growth should quicken. But, that will take time and it won't help incumbent politicians looking ahead to the elections his fall. Monetary policy already has short-term rates near zero and mortgage rates are at the lowest level since the 1950s, which is helping some families refinance. Monetary policy can't do much more, although prevailing low rates will work in time. And fiscal policy has become so politicized, it is unlikely to provide much help legislatively. Perhaps in the name of an energy policy, incentives can be provided to adopt solar, wind and gas to replace coal. Unless something creative is done, economic growth is likely to recover only slowly.
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