Despite widespread fears that dramatic budget changes would wreck an already fragile recovery, Congress unsurprisingly decided not to stray from their recent modus operandi and do what they do best– which became exponentially more prevalent since the current substandard Supreme Court decided to let corporate billions subvert the democratic process via the inexplicable ruling in Citizen’s United–nothing.
Marginal income tax rates on top earners went up at the first of this year, and—more importantly—a reduction in the payroll tax rate adopted for stimulative purposes was allowed to expire. Other automatic cuts, the inexorable Sequestor, were delayed by a few months, but they too were allowed to take effect in March.
How to Dismantle a Superpower
Ever since the 2010 wave of poorly-qualified freshmen Congresspersons brought ineptitude to a new high in American politics, America’s bickering Republicans and Democrats have mostly resolved their fiscal differences by postponing them. That approach came to a head at the end of last year, when a horde of tax increases and spending cuts were allowed to take effect.
The world has since watched and waited – admittedly perplexed – as January and February came and went without a collapse in economic activity. Employers continued to hire at an average pace of more than 200,000 jobs per month to start the year. Many asked: had the American economy healed enough to absorb a falling deficit without much pain, or had it simply run off a fiscal cliff but not yet looked down into the chasm below?
As I alluded to last week, the U.S. version of the failed Austerity experiments in the Eurozone and the UK is a slow-moving killer. Think python, not rattlesnake. It slowly, painfully squeezes the life out of its victim.
New figures from the Bureau of Labor Statistics suggest that the austerity may have begun to bite in March. Nonfarm payroll employment rose by just 88,000 jobs that month according to the first estimate: well below expectations and the worst performance since June of last year. If contemporary patterns continue-and there’s certainly nothing happening in Washington that would suggest any reason to think otherwise- that figure will be revised up. It is sufficiently low, however, to warrant concern.
Government employment subtracted 7,000 from the 95,000 private-sector job creation figure. In a possible sign of the impact of the payroll tax hike, retail employment tumbled by 24,000, and job gains in the sector in January and February were revised downward.
Signs of weakness pepper the jobs report like warts on a toad. Though the unemployment rate ticked down to 7.6%, it was largely due to a continuing exodus of workers from the labor force. Employment in the “household survey”, from which the unemployment rate is drawn, also dropped, as did the labor-force participation rate and the employment-population ratio (both of which performed poorly through all of the past year despite decent payroll growth). One would have to be deaf, dumb and blind to believe that there isn’t ample concern that worse is to come, given that March Sequestor cuts barely registered in this report. Not surprisingly, fears are well-founded that for a fourth year in a row the economy will have begun the year strong only to drop into a summer swoon.
An Optimist’s Point of View
Yet there are also some reasons not to overreact to the report. The likelihood of Sequestor revisions is one, although I don’t think they will be to the liking of Americans on the left, older American, poor Americans, middle-income Americans, or unemployed Americans. Though some economic indicators point to a slowdown in economic growth in March, few suggest the recovery is coming to a screeching halt, and still others are fairly bullish. Though the March slowdown in hiring was broad-based, there continue to be encouraging signs of an increase in construction employment associated with a slight but continual return to a modicum of normality in residential housing. Hours worked and hourly earnings also ticked up.
The good news is that the Federal Reserve’s policy framework has evolved since the last time a summer swoon occurred. The Fed’s open-ended asset-purchase plan and economic thresholds for rate increases mean that when bad news hits policy is automatically expected to stay accommodative for longer. Recent comments from Fed officials indicated that sustained, decent employment growth might lead QE3 to be scaled back by the end of the summer; but the BLS report has made that much less probable.
To some extent, this report simply drags expectations back to where they were early in the year, when it was anticipated that fiscal policy would meaningfully slow growth in the first half of the year but allow for an improvement later on–especially if you also believe in unicorns.
If surprisingly good numbers led some to believe that the American economy would shake Sequestor cuts off without any effect, then perhaps they were a bit overoptimistic.
Those same people would believe that perhaps it won’t be hot in Mississippi this summer.
Harvey A. Gold