The Federal Reserve recognized that the economic recovery has slowed in recent months, according to the FOMC statement issued yesterday. The central bank also said that inflation has “trended lower in recent quarters” and that pricing pressures are likely to remain “subdued for some time.” What will the Fed do to a) help keep deflationary pressures from gaining strength and b) bolster growth? Two things, according to the FOMC announcement. One, it will keep Fed funds at a zero-to-25-basis-point target rate for an “extended period.” Two, it will invest the proceeds from its bloated mortgage and agency debt portfolio in longer-term Treasuries to help keep long rates low. The question, of course, is whether this will suffice to offset the downshift in economic momentum of recent months? No one really knows, but the argument that this is enough looks thin.
IS THE STREAK IN HIGH LABOR PRODUCTIVITY HISTORY?
If you were looking for one more reason to wonder about the already shaky prospects for a recovery in the labor market, today’s report on second-quarter worker productivity is just the ticket.
FED TALK
The Federal Open Market Committee meets tomorrow to discuss monetary policy at its regularly scheduled confab. No one expects a rate hike, of course, but the debate about how the central bank might do more with so-called quantitative easing has the crowd buzzing…
►Dow Jones:
Disappointing growth and stubbornly high unemployment is likely to leave Fed officials with the important task of deciding whether to further bump the economy with a debt-buying program, said James Hughes, a market analyst with CMC Markets. “Whether this happens is still very much up in the air, but the reaction by the major markets could well be an aggressive one. Markets could see the move as a good sign of officials seeing the problem and acting before its too late. On the other hand, a further sign of a stuttering economy could well spook the markets in to a bigger fall for equity markets,” said Hughes.
►Bloomberg News:
Treasury two-year yields approached an all-time low amid speculation that the Federal Reserve will resume bond purchases this week as it seeks to safeguard the U.S. economic recovery.
THE DEBATE ABOUT DEMAND
There are economic recessions, and then there are economic RECESSIONS. The latest encounter with the dark side of the business cycle undoubtedly satisfies the later definition. The challenge, then, is figuring out how to convincingly promote growth on a sustainable, meaningful basis. Part of the solution requires deciding what went wrong, which suggests possible responses. On that analytical front, however, the standard advice from the dismal science these days is flawed, argued Nobel Prize winner Edmund Phelps in a New York Times op-ed last week.
TALKING ABOUT JOBS, GDP & RELATED TOPICS
The July jobs report was a mixed bag, as we discussed on Friday. What does the punditocracy think? A brief sampling…
►Seattle Times:
“If we don’t see significant job growth by the end of the year, the economy could be in serious trouble,” said Bill Cheney, chief economist at John Hancock.
►San Francisco Chronicle:
“A double dip (recession) is not likely, but not out of the question,” said Sung Wohn Sohn, an economics professor at California State University Channel Islands.
ANOTHER ROUND OF MIXED NEWS ON THE JOB FRONT
U.S. unemployment remained unchanged at 9.5% and nonfarm payrolls shrunk by 131,000 last month, the government reported this morning. That’s not good, but it’s not quite accurate either once you consider that July is lighter by 143,000 temporary census workers. If we focus on the private sector, nonfarm payrolls rose by 71,000 in July. That’s better, but it’s still well short of what’s needed to convince the crowd that the economy is on a sustainable path of growth worthy of the name.
FRIDAY’S READING LIST: 8.6.2010
►Retailers don’t see back-to-school boost, report spotty sales for July
Cautious consumers translated into spotty sales for national retailers in July, according to data released Thursday, potentially signaling a tough back-to-school season for the industry.
►German Industrial Production Unexpectedly Declines
Industrial production in Germany, Europe’s largest economy, unexpectedly declined in June led by a drop in investment goods such as machinery and trucks.
PONDERING PROGRESS IN THE MONEY GAME
Is money management getting any better? How would we know? I wrestle with these and related questions in a story just published in the August 2010 issue of Financial Advisor magazine: “Searching For Progress: Financial innovation is under fire. Failing to beat the market is only one reason.”
MORE TROUBLE WITH WEEKLY JOBLESS CLAIMS
Today’s update on weekly jobless claims isn’t very encouraging for expecting a big positive surprise in tomorrow’s news on nonfarm payrolls for July. And that’s the charitable interpretation. But judge for yourself: the latest number on new filings for unemployment benefits shows a rise of 19,000 last week, bringing the weekly total to 479,000—the highest since early April. The year is more than half over and still no sign of improvement in this metric. So much for a V recovery, at least as far as new jobless claims go.
A BULL MARKET IN SAVING
Seth Fiegerman at MainStreet.com wonders if the U.S. is overdosing on savings. “Americans are getting better with their money, but in the process, we may be undermining the country’s financial recovery,” he wrote yesterday.