The US Recovery

[DOR]

July 2015 unemployment lowest in 7+ years.

US unemployment fell to an 86-month low of 5.26% in July. For the first seven months of 2015, unemployment has averaged less than 5.5% (i.e., below the long-term average) as job creation out-paced the rise in the labor force by a full percentage point, 1.88% YoY vs. 0.88%.

In July, employment grew by a solid 1.7% year-on-year, the 59th straight month of expansion. The 0.7% rise in the labor force is slightly ahead of the 18-month average (the denominator has grown for 18 months in a row).


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For those who understand such things, and don't just use it as a proxy for unemployment or a way of bashing statisticians, the U6 rate fell to 10.4%, also the lowest level in over 7 years.

[DOR]

Why the Fed Should Wait

Prof Brad DeLong, UC Berkeley (paraphrased; see http://www.bradford-delong.com/2015/...-the-next.html for the full analysis):

Raising interest rates in September “would threaten the Federal Reserve's ability to fulfill its mandate to deliver maximum feasible employment.”

• In 2005-2007, neither Greenspan nor Bernanke had any idea how fragile mis- and un-regulation had left housing finance and the New York money-center universal banks.
• In 1993-1994, Alan Greenspan had no clue how much of an impact what he saw as small policy moves would have on long-run financing terms--but fortunately he shifted policy and stopped raising interest rates in midstream (over the protests of many on his committee).
• In 1988-1990, Alan Greenspan had no clue how much of an impact it would have on the balance sheets of southwestern S&Ls. The federal government had to give three months of total Texas state income to Texas S&Ls and their depositors who had been chasing high yields in order to clean that up.
• In 1979-1982, Paul Volcker did not realize that raising interest rates would bankrupt not only Latin America but also leave Citibank and others as zombies--things that were bankrupt, and that ought to have been shut down, but that were allowed, via promises of government rescue if necessary, to earn their way out of bankruptcy over the next five years.

Thus I cannot see a plausible benefit-cost analysis that leads to any rational decision to raise interest rates absent forecasts that show either significant current or the high likelihood of rapid emergence of unwanted inflationary pressures.

The economy is still extraordinarily not-normal along at least six dimensions:

1. The equity return premium has reverted to its immediate post-Great Depression generation 7%/year or so, reflecting a very not-normal failure on the part of financial markets to mobilize any appreciable part of society's risk-bearing capacity.
2. Fiscal policy in the U.S. and even more so in the rest of the North Atlantic remains extraordinarily contractionary, in levels of spending if not in rates of change.
3. The future regulatory structure of housing finance in the U.S. remains extraordinarily unsettled, leaving only risk-loving banks with any incentive to extend themselves to finance a return to what we used to see as normal levels of housing construction.
4. Falling population growth and difficulty in finding large-scale private investments have diminished private demand for investment capital.
5. And the rise of both the rich of emerging markets seeking safety for the wealth of their dynasties and of emerging market governments seeking guarantees of policy autonomy has created Ben Bernanke's global savings glut.
6. The unemployment rate has nearly normalized; the employment-population ratio has not.
With all six of these extraordinary non-normalities still on the table, why should the fact that the unemployment rate and capacity utilization are no longer extraordinarily non-normal lead to any presumption that interest rates ought to be near-normal as well?

= = = = =

I agree.
─DOR

[tbm3fan]

I just have to roll my yes. All this angst over raising the Fed Rate when the target has been set at 0.00 - 0.25% for god knows how long. Just goes to prove that once something is made practically free then it is hard to take it back. Nothing better than free money is there? One would think the world will end if it went up 0.25%.

Motto: never make anything free

[JAD_333]

Dor:

Agree. It's too soon for a rate increase.

[GVChamp]

We definitely need to wait to raise rates because my friends aren't done buying houses yet.

Self-Interest FTW :)

[Bigfella]

Dor:

I think we'll have to wait for a European recovery before we break 3%, but I agree with you, considering the state of the world, the US is doing pretty well.

Good news, looks like you broke 3.5%. Not sure if that will hold given what is happening in China, but it shows that the underlying state of the economy in definitely improving. Well done Obama. ;-)

http://www.bbc.com/news/business-34074377

[JAD_333]

Good news, looks like you broke 3.5%. Not sure if that will hold given what is happening in China, but it shows that the underlying state of the economy in definitely improving. Well done Obama. ;-)

http://www.bbc.com/news/business-34074377

It's good news indeed. It would be even higher if not for the sequester--not so well done Obama. :)

[Red Team]

It's good news indeed. It would be even higher if not for the sequester--not so well done Obama. :)

JAD,

Honest question, what could Obama have done to avoid the sequester if that eventuality was primarily in the hands of Congress? Not trying to absolve him or anything, just can't think of a way that any one man could have fixed that political Charlie Foxtrot.

[DOR]

It's good news indeed. It would be even higher if not for the sequester--not so well done Obama. :)

I was not aware that the POTUS had the kind of congressional power necessary to enact a sequester, nor that this President would do such a thing. Let's not rewrite history: That shameful downgrade of the country's sovereign credit rating was purely a GOPer disaster.

[JAD_333]

JAD,

Honest question, what could Obama have done to avoid the sequester if that eventuality was primarily in the hands of Congress? Not trying to absolve him or anything, just can't think of a way that any one man could have fixed that political Charlie Foxtrot.

The idea was first floated by the White House, but, regardless, Obama didn't have to go along with it. It has resulted in less government spending, which the administration likes to point to as an achievement. Meanwhile, the military is slowly inching toward the kind of sad shape it was in during the post-Vietnam era of the 1970s. This is the kind of political tradeoff that ends up hurting national security. If it continues much longer, our bark will be worse than out bite.

[JAD_333]

I was not aware that the POTUS had the kind of congressional power necessary to enact a sequester, nor that this President would do such a thing. Let's not rewrite history: That shameful downgrade of the country's sovereign credit rating was purely a GOPer disaster.

You were not aware the sequester needed the president's signature? His people sold the idea to Congress, he gets the credit. Congress gets its share too. As for the downgrade by a privately owned rating agency smarting from its own shameful behavior in prolonging the housing bubble, so what? Nothing came of it.

[Gun Grape]

Meanwhile, the military is slowly inching toward the kind of sad shape it was in during the post-Vietnam era of the 1970s. This is the kind of political tradeoff that ends up hurting national security. If it continues much longer, our bark will be worse than out bite.

Yea because our Navy is only bigger than the next 19 navies combined. Our Air force is the largest in the World. The US Navy has the second largest Air Force in the world.

I think we will be safe even if we continue to cut the budget for a few more years.

[DOR]

You were not aware the sequester needed the president's signature? His people sold the idea to Congress, he gets the credit. Congress gets its share too. As for the downgrade by a privately owned rating agency smarting from its own shameful behavior in prolonging the housing bubble, so what? Nothing came of it.

Were you not aware that the GOPer controlled House refused to raise the debt ceiling – in other words, refused to honor constitutional obligations to repay debts incurred over many years – unless a plan to cut $2.4 trillion over ten years was enacted?

And, were you not aware that the resulting downgrading of the Government's credit rating added billions to the cost of servicing debt, thus making it harder to usefully support the economy?

And, were you not aware that such a drastic reduction in economic demand during the worst financial and economic crisis since the 1930s was the opposite of what would help the economy stabilize?

[Doktor]

Who said the ceiling must be raised?

IIRC, when S&P were downgrading it they pointed out to ALL institutions as a reason for doing so. Shifting the blame to just one branch is revisionism.

[Gun Grape]

Who said the ceiling must be raised?

The 14th Amendment of the US Constitution and SCOTUS rulings such as the 1935 case Perry v. United States,

“by virtue of the power to borrow money ‘on the credit of the United States,’ the Congress is authorized to pledge that credit as an assurance of payment as stipulated--as the highest assurance the Government can give, its plighted faith.”