As November Payrolls Fall, Fed's Toolbox Is Limited

The Labor Dept.'s November report revealed a downward jobs spiral and raises concern about the effectiveness of monetary policy to combat the recession

The loss of 533,000 nonfarm jobs in November, announced in the Labor Dept.'s employment report released on Dec. 5—after huge revisions to the payroll loss numbers reported for September and October—makes clear that the U.S. economy hit a brick wall in September and has been spiraling downward ever since. The nation's various economic data will set many post-Depression records during the coming two quarters as the "Great Recession" takes hold. Certainly we are in for a nasty slew of economic reports through the holiday season.

The U.S. jobs report managed to undershoot market pessimism, both with the hefty drop in payrolls, which was the report's headliner, the downward back-revisions, and a 0.1 hour decline in the average work week, to 33.5 hours. That meant a big 0.9% decline in November hours worked. Hours worked are poised for a -7% pace in the fourth quarter, following the -2.2% third-quarter figure, and we have revised down our fourth-quarter U.S. gross domestic product forecast to an annual rate of -5.0% from -4.0%. This follows a -0.5% rate in the third quarter that looks poised for a small upward revision to -0.3%.

There was some good news, relatively speaking, in the November jobs report that diminished the headline effect from the massive payroll and workweek declines. The jobless rate "only" rose to 6.7%, as a 422,000 drop in the labor force in November mitigated some of the effect of the big 673,000 drop in civilian employment. And hourly earnings rose 0.4% in November, to leave a 4.1% year-over-year gain, restraining the negative impact of the jobs decline on income.

Surge In Unemployment

The jobless rate is still likely to post a big gain in December, and we will assume a 7.0% rate by yearend. The 0.4% hourly-earnings gain offset less than half the effect of the 0.9% drop in hours worked on wage income—but at least these figures didn't aggravate the effects of the big payroll declines.

It is now clear that we are seeing the sharpest pace of decline for the U.S. economy since the particularly harsh 1980-82 or 1974 downturns, and possibly since the Great Depression. Media references to the "Great Recession" will keep panic alive, both among households and businesses, through the remainder of the holiday season or longer.

It's unclear when the effects of the massive deleveraging process now under way will start to diminish, but nasty November economic reports to be released through the remainder of December and early January will likely continue to fuel public austerity in the near term.

When it comes to the Federal Reserve's response, we continue to assume policymakers will lower the 1.00% fed funds rate target at the Dec. 16 Federal Open Market Committee meeting, though the effective rate has already settled in the 0.25%-0.50% range and has little room for downward adjustment. As it did at its Oct. 28-29 meeting, however, we expect the Fed again to chase its tail with a target reduction to the 0.50% area that seems to simply close the gap to the actual rate, though the reduction will likely further depress the effective rate toward zero.

Massive Market Pressure

The real policy questions concern the degree to which—and the aggressiveness with which—the Fed deploys various "quantitative easing" strategies, moves similar to those once deployed by the Bank of Japan. The Fed will be under continuous market pressure to expand its balance sheet and remove paper from the financial markets in exchange for reserve credit, in the hope that it will eventually be able to jump-start the lending process and force credit back into the collapsing economy. The interest rate tool has largely already been fully deployed, given the near-zero fed funds rate, and the massive spreads to private debt instruments are now the primary barrier between lower rates in the reserve market and lower rates for nonbank borrowers.

It will be interesting to see to what degree the Fed attempts to inject such thoughts into the policy statement it issues on Dec. 16. The committee members could seek to tell us where they want the fed funds rate to trade, vs. regurgitating a "target" they have no intention of achieving. With some new verbiage, they might clarify their objectives in expanding the balance sheet, in quantitative terms. Perhaps they could provide a signal that they are willing to do what it takes when it comes to expanding the central bank's balance sheet.

Yet the FOMC should also seek to describe the economic landscape in a way that inspires confidence rather than further panic—and this might argue against providing too much detail on the awful state of the economy, or the hefty balance sheet expansion that might be necessary.

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