Parades, fireworks, patriotic songs, 150 million hot dogs consumed, 41 million car trips of more than 50 miles -- and heightened security in reaction to Islamist terrorist threats to disrupt our celebration with murder and mayhem as part of their celebration of their holy month of Ramadan. That’s all part of the celebration of our independence from Britain, which at that time specialized in governing us by executive fiat. One day before the holiday weekend began, the government reported that in June the economy added 223,000 non-farm jobs, fewer than most had expected. Adding to the disappointment was
· a downward revision of 60,000 in the estimate of job creation in April and May,
· failures of hourly wages and the average work week to rise, and
· news that some 432,000 workers dropped out of the labor force in June, driving the share of working age men and women participating in the labor market to the lowest level in almost four decades.
Still, the economy remains on track to add 3 million jobs this year, as it did last year. Kevin Hassett, director of economic policy studies at the American Enterprise Institute, points out that the rate of U.S. job growth suggests that the economy is growing at an annual rate of about 3%, an estimate supported by several other bits of evidence.
Unfortunately the so-so jobs data provide little guide to what the Federal Reserve Board’s monetary policy committee might do to interest rates, or when they will do it. Job and economic growth are slow enough to justify holding interest rates at current near-zero levels, and fast enough to justify a slight upward move later this year.
My guess is that the Fed will hold at current rates until 2016, but the operative word in that sentence is “guess”. I base it on three facts. First, Fed chairwoman Janet Yellen wants to see a reduction in the two million workers too discouraged to seek work or involuntarily working short hours before making a move. Second, she and her colleagues want the current nil inflation rate to rise to something closer to the Fed’s goal of 2%, which it has not done for 37 consecutive months. Third, the International Monetary Fund is lending respectability to the hold-the-line advocates by calling for the Fed to keep interest rates at current levels until next year.
Oh yes, and only a Grinch would raise interest rates in the run-up to or during the Christmas shopping season. The Fed reminds economists at the Lindsey Group of St. Augustine. It “knows it should be virtuous, it just needs to wait a bit longer … constantly kicking the can, … [in] fear of ending the party.”
Here’s why I might be wrong. Many economists and businessmen whom I respect are saying that the figure of 3% understates just how rapidly the US economy is really growing. They expect revisions, common occurrences in the case of GDP figures, to reveal that the economy has been growing at an annual rate of 3.5%, or even higher, which should satisfy Yellen as just about right – the famous Goldilocks level of neither too hot nor to cold. They also expect that monthly job creation will remain above 200,000 for the rest of the year, which would bring the economy to full employment (as traditionally measured) by mid-2016, and put upward pressure on wages and on inflation. Such strength would certainly justify the Fed in beginning to inch interest rates up in advance of inflationary pressures, even if only by a modest one-quarter of a percentage point.
In the end, this dispute over the timing of an interest rate increase is of more interest to traders in shares and bonds than to the performance of the real economy. Corporate decision-makers are already factoring in a modest rise in interest rates next year, which is why they are borrowing at a record rate – get your cash before its price rises – to finance a boom in mergers and acquisitions. Consumers are not incurring high levels of debt that might cause problems should rates rise. Instead, although stepping up spending recently, they have maintained their savings rate at around the 5% historical average. And the current accelerating level of activity in the housing sector can survive the modest and gradual rate increases Yellen has in mind.
Sales of existing homes in May were up for the eighth straight month and were 9.2% above last year, prices for those homes were up almost 8%, and new-home sales were up 20%. Pending home sales, a forward-looking index of sales contracts due to be closed in the next few months, are at their highest level in more than nine years. There is more good news.