Pragmatic Capitalism

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It seems that just last week the economic recovery was “self sustaining”.  It was difficult to find many economists or pundits who didn’t like the data or the general improvement in economic trends.  But one average payrolls report later and suddenly it seems like everyone thinks the recovery is on thin ice and likely requiring more government aid (as if QE helps in the first place).  Here’s a sampling of responses from this morning’s research reports (mostly via the WSJ):

Paul Krugman:

“Meanwhile, just a quick note on the jobs report; not good, of course. You don’t want to overreact to one month — but this shows the utter folly of all the talk about how it’s time to move from stimulus to tightening, time for the Fed to worry about inflation instead of jobs, and all that. We’re still very much in the Lesser Depression, and all our focus should be on getting out.”

Mark Thoma:

“This is just one month’s worth of data, and monthly data can be noisy so it’s not time to panic yet. The recovery could pick up steam again next month. But the possibility that it won’t pick up, e.g. because unseasonably good weather distorted the numbers for the last few months, has to be taken seriously by policymakers. Those in charge of monetary and fiscal policy must realize that forecasts have both upside and downside risks, and that doing too little if economic growth turns out to be slower than expected is far more costly than doing too much because economic growth exceeds projections.”

Brad Delong:

“Unemployment rate declines that spring from falls in the employment to population ratio are really unwelcome…”

Neil Dutta, Bank of America Merrill Lynch:

“The March employment report was decidedly downbeat and offsets some but not all of the positive tone we’ve seen in recent labor market indicators. All you have to do is check off the boxes. Softer payroll growth? Check. Shorter work week? Check. Soft earnings? Check. ”

Dan Greenhaus, BTIG LLC:

“The decline in [the employment to population ratio] has been instrumental in keeping the unemployment rate lower than it might otherwise be, something that Ben Bernanke is keenly aware of. While the labor force has surged of late, taking it back to, roughly speaking, peak levels, it remains below the level at which it would have been had previous growth rates been realized. Again, Ben Bernanke knows this and when discussing the role of monetary policy, QE3, in the current environment, the discussion is not only about asset prices or inflation. The debate about whether monetary policy can help fix what some believe is wrong with the labor market and right now, despite what some are saying, Ben Bernanke believes the answer is “yes.”’

Goodness gracious.  How quickly the negativity comes back to bi-polar pundits, huh?  Even more surprising is the short memories regarding QE2.  Did we all forget that QE2 did approximately nothing for the US economy?  Now, QE in Europe has worked, but only because it’s essentially helped fund member states.  That’s entirely different from the way QE works in the USA where it simply swaps assets.  What we’ve seen in Europe in recent months is totally different and has been supportive.  But QE3 if implemented in the same manner as QE2 is unlikely to do much aside from cause asset prices to once again deviate from fundamentals.  Then again, maybe that’s all anyone cares about anymore….If we can keep asset prices up then everyone wins, right?  Never mind that the underlying fundamentals might be deteriorating….Hopefully that’s not the mentality that most investors are taking now, but given two decades of the Greenspan and Bernanke Puts I guess we shouldn’t be surprised that that mentality is increasingly popular.

Me personally?  I don’t think this changes the outlook for QE.  The Fed has now been crystal clear.  They’re not implementing further QE with the core inflation rate over 2%.  Today’s report doesn’t change anything.  Now, if this weakness becomes a trend then maybe the QE argument begins to pick up steam.  But I’m still in the “no 2012 recession” camp.



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