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The Fed Ponders the Jobs Report

12:00 AM, Jul 6, 2013 • By IRWIN M. STELZER
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Until recently it has been fashionable to denigrate the U.S. economic recovery: “America is the best house in a bad neighborhood,” sniffed many analysts. No longer. America is now a very good house in a terrible neighborhood.

President Barack Obama and Fed chairman Ben Bernanke.

President Barack Obama and Fed chairman Ben Bernanke.

·     “Domestic factories buck global slowdown,” headlines the Wall Street Journal’s report of the increase in new orders and production in the U.S., and the weakening of manufacturing activity in Europe, much of Latin America, and most of Asia, including China.

·     Vehicle sales in the U.S., up 9.2 percent in June, are at their highest level since 2007, while new-car registrations in France, Italy, and Spain fell in June by 11, 10, and almost 5 percent, respectively.

·     Spring art auctions in London paled by comparison with those in New York. The New York Times reports that Christie’s one-evening sale of contemporary and post-war art in New York fell only a bit short of topping the total of all five auctions in London.

·     U.S. investment banks, after years of ceding market share to European rivals, are increasing their share of the global investment banking pool, often expanding in markets from which European rivals are withdrawing.

·     IMD, the international business school, reports that America is once again the world’s most competitive economy because of the strong cash position of our companies and its record of innovation, among other things. Professor Stephane Garelli, director of IMD’s World Competitiveness Centre, told Forbes interviewers, “Over the last fifteen years, most of the big innovations that have changed our lives … were born in the US.”

·     While Europe struggles with high energy costs,  Britain faces a looming electricity shortage, and China’s development of its shale resources is stalled, America is on course to produce more oil than Saudi Arabia by the end of this decade, and to become a major exporter of natural gas.

·     Previous comparisons that showed China the eventual winner in its competition with the U.S. are being re-thought. Consultants A.T. Kearney’s survey of executives from 302 companies worldwide shows that for the first time in over a decade America has replaced China as the most favorable place for foreign direct investment. Japan’s Toyota, India’s Apollo Tyres, Germany’s Siemens, and myriad Chinese real estate investors are pouring money into the US.

This is more than a writer afflicted with a severe case of chauvinism caused by excessive exposure this weekend to patriotic songs and parades celebrating our independence from a then-leading colonial power. It is a reaction to a flow of rather good news that has driven consumer confidence to a post-recession high.

With reason. Household net worth is at an all-time high. Households are spending less of their income on servicing their debts than at any time in the thirty years since records have been kept. Rising house prices have enabled 1.7 million households to escape negative equity—their homes are now worth more than they owe on their mortgages. Little wonder that consumer spending is perking up.

The jewel in the crown of the American recovery remains the housing sector. Sales of new homes jumped 2.1 percent in May, to their highest level in five years. That makes it three consecutive months in which sales have risen. Prices are also on the rise, and are now some 10 percent above year-ago levels. Home building, although still running at only half the previous peak, is rising. With the supply of new homes down to about 4 months, further increases in construction activity are probable—unless a shortage of building lots and skilled workers makes it difficult for home builders to step up the pace. Builders report that many of electricians and other skilled workers laid off when builders cut their staffs almost in half have migrated to jobs in other industries, and that many unskilled illegal Mexican workers have returned to their villages.

Two dangers lurk. The first is the recent run-up in interest rates, which has taken the rate on the commonly used 30-year, fixed-rate mortgages up about a full percentage point, to around 4.5 percent, in a relatively few weeks. Some experts say that this jump, and the fear that rates will head still higher, will encourage buyers to come off the sidelines and into the housing game. Others say that higher rates will discourage many buyers. There is evidence enough for both sides of this argument. The Mortgage Bankers Association says that purchase applications rose 7 percent since interest rates headed up, while Redfin, a property web site, reports that the number of clients making offers fell 10 percent during that same period. It will be several months before we learn which of these early signals on the road to still higher rates is pointing in the right direction.

The second worry is that we have entered bubble territory. In the hotter markets, homes often stay on the market for only a few days, and eager buyers pay above asking prices. That, plus the rumored re-emergence of risky lending practices, screams bubble to analysts who remember conditions in 2007. Perhaps, but only perhaps. Houses are in short supply, prices are far below their 2005 peaks, the bite that mortgage payments take out of incomes remains low by historic standards, and the jobs market continues to improve, surprising on the upside.

The private sector added 202,000 jobs in June, the third straight month in the 200,000 range. An uptick in the labor force participation rate, and a ten-cent increase in average hourly earnings are further bits of good news. But the unemployment rate remains stuck at 7.6 percent, and the number of workers counted among the employed but involuntarily working short hours increased by over 300,000.

All in all, good but not great. The wealth effect resulting from higher house prices seems to have offset the drag created by tax increases and the sequester’s cut in government spending. If the Fed is worried about continued high unemployment, it will postpone any tapering in its asset-buying program. But if it agrees with many private-sector forecasters that U.S. growth will accelerate in the second half of the year it will start cutting back its purchases in September. A sprucing up of the global neighborhood in which the U.S. economic house resides might just tip it towards tapering. 

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