The Fed and the Disappointing Jobs Report
With weaker-than-expected payroll expansion, the jobs report for September suggests the U.S. economy isn't immune to the global economic slowdown. The disappointing performance reduces the probability the Federal Reserve will raise interest rates in October. Yet the continued stimulative monetary policy of close-to-zero rates is, by itself, unlikely to do much to resolve what ails the U.S. and the rest of the world.
The addition of 142,000 jobs last month reported by the Labor Department on Friday fell well short of the 200,000 expected by markets. That setback was accompanied by flat wage growth and indications of a contracting manufacturing sector, as well as downward revisions to the estimates of job growth for August and July -- which also contradicted consensus market expectations. The gloom was further accentuated by a decline in the labor participation rate, which has returned to levels last seen in 1977.
The mediocre data calls into question the conventional wisdom that had taken hold in markets and among policy makers.
Until now, there was a general sense that even if robust U.S. economic growth alone couldn't pull the rest of the world, it was solid enough to protect the nation from weakness elsewhere. This view will be challenged by the jobs report, which suggests the U.S. economy could be vulnerable to the global economic slowdown.
Under such circumstances, it is hard to imagine how the Fed could decide to raise rates when it meets this month. Yet leaving in place the monetary policy stimulus of recent years will do little to offset concerns about the weakening fundamentals.
It is becoming increasingly clear that the central bank’s commitment to continue to carry the bulk of the policy burden isn't sufficient to generate high, inclusive and sustainable growth. Congress needs to step in, too, allowing the government to deploy a broader set of policy responses.
Alas, there is little to suggest that such a reaction will be forthcoming. This inertia will hold back corporate enthusiasm for actively deploying large cash holdings into larger productive capabilities and employment.
Markets and the global economy are moving closer to an inflection point: Either the growing global economic malaise, accentuated by a structural increase in financial market volatility, will be a wake-up call to policy makers, or the global economy will slip deeper into a self-reinforcing malaise, making it very hard for the central bank to contain financial volatility.
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