The May 2012 jobs report from the Bureau of Labor Statistics (BLS) is disappointing in terms of the absolute number of jobs that were created last month.
To recover to a full employment target of 4%, within the scheme of conventional economic thinking that is currently in place, without losing any jobs at least 250,000 jobs must be created every month through the end of 2014 – when Federal Reserve monetary easing is expected to end. Only about 69,000 new jobs were added in May. This number represents a steady trend of fewer jobs being added month after month since the beginning of this year.
We are disappointed by the language used by BLS to describe the May employment situation as being essentially unchanged from previous months.
It is clear, as we have argued in our earlier commentary on the US economy in these pages, that the downside risks to growth are gaining traction in this election year to balance between the Federal Reserve’s primary concern of maintaining inflation around 2% year-on-year change in the Consumer Price Index (CPI)-excluding food and energy (Fed’s preferred measure though we disagree with it) in an environment of extraordinary monetary easing and the cost of employing more workers.
Geopolitical and geo-economic concerns – in Europe and the Middle East, besides tenuous global inflation expectations due to continued strong Chinese growth while recovery in the rest of the world is plateauing off or slowing – remain.
We urge the Federal Reserve to seriously consider alternative and more intrusive approaches to monetary transmission in the United States toward lowering structural unemployment by promoting structural change, as we always have since 2008, without any further quantitative easing.
Lowering long-term interest rates any further by the Fed will render the spread even more unattractive for real investment even though it may lower interest payment expenditures on outstanding federal debt for the government. In fact, as counterintuitive as it may seem to the Fed, raising long rates could increase domestic investment.
Fiscal policy must, therefore, cease to be expansionary in terms of further increases in the debt ceiling. Government spending must be allocated more efficiently in a manner consistent with the principle of a limited but strong government and consistent with our above recommendation for monetary policy.
Without the above considerations by policymakers, Transformations predicts a recession in the United States by end-2012 which could be exacerbated into a depression because of the steadily heightening risks to US debt and dollar between now and 2016, falling manufacturing index (less than 50 means a recession) and deteriorating consumer sentiment.
Intransigence on the part of the Federal Reserve and US Treasury to heed this advice could result in the replacement of the Head of the Federal Reserve, Benjamin Bernanke, and the Secretary of the Treasury of the United States, Timothy Geithner (who was asked by the president to stay in 2011), by the White House.