From the July 01, 2011 issue of Futures Magazine • Subscribe!

Treasuries up & economy down

Hi-ho, hi-ho

Like the housing market, employment took a surprise hit in May that had economists questioning the strength of the recovery. While we had seen strong job growth throughout the first half of the year, May non-farm payroll came in at a paltry 54,000 jobs, which was off economists’ expectations by more than100,000.

"Normally by this point in a recovery, we should be seeing payroll growing by 250,000-350,000 a month and the unemployment rate falling quite rapidly," Dales says (see "Will work"). "We have had some indications that job growth is doing OK, but it looks like the slowdown in economic growth that began earlier this year is prompting some companies to hold back on hiring."


Patton points to the Japanese earthquake and high commodity prices as prime suspects for the slowdown in hiring.

While unemployment dipped below 9.0% in the spring, the recent disappointing reports pushed it back above 9%. A bifurcated recovery especially has become evident over the months since QE2 was initiated. We’ve seen what many analysts are calling a jobless recovery where stocks have done particularly well, but consumers and Main Street have continued to struggle.

This is creating a new equilibrium in the marketplace where companies increasingly only are producing the goods and services they know will be absorbed by demand. "Stocks go up based on earnings, and earnings are going to continue to do well because companies can produce fewer goods with less people and still be profitable," Springer says.

The result has been Bernanke’s hoped-for wealth effect where Americans who own stocks feel richer because they have seen their equities increase in value. As a result, these people have begun spending more as is evident in the last round of earnings reports where companies such as Macy’s and Saks Fifth Avenue did well, but Walmart and Target underperformed.

With QE2 finished and stocks reversing, patterns are emerging that are very similar to last year when the first round of quantitative easing came to an end. Regardless, most analysts seem to think it is unlikely the Fed will initiate a third round.

"The Fed is having a problem with a full-blown QE3 because of diminishing returns. Each time you do it, you get a little bit less, so you get to a point where it’s not even worth doing. That’s where we are now," Springer says. "The best way to get the economy back on track is to let the economy settle into a new equilibrium. All quantitative easing does is create artificial demand and puts money into the system that shouldn’t be there."

While Bernanke did not mention further easing in his speech to the International Monetary Conference, he did say the recovery cannot be considered established until we see "a sustained period of stronger job creation." Further, although he said accommodative monetary policies cannot be a "panacea," he did say the Fed will continue to reinvest principle payments in its holdings.

This is a sign that an exit strategy is still months away because this will need to end before the Fed could consider tightening.

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