Unemployment rate in the United States has ticked up once again, as expected, in the first month of the fourth and last quarter, Q4, to 7.9 per cent. It is expected to rise further after seasonal adjustment for the post-election and Holiday seasons in Q4 through December 31, 2012.
Within margins of measurement and other statistical errors, US unemployment is, for all practical purposes, unchanged in 2012 after showing recovery from mid-2011 to end-2011. Growth is expected to return to 1.7% for all of 2012 after the September spurt to 2% largely helped by the sales of Apple Computer Corporation’s iPhone 5 and other products and the wealth effect-induced consumption because of highly accommodative money supply from the Fed for an extended period of time at least until mid-2015.
Q1 2013 macroeconomic indicators will be dependent on changes in economic policy at the Federal Reserve, US Treasury and in the Congress after the election on November 06, 2012, though the primary risk is pointing to exacerbation of the state of tepid stagflation in the US economy with year-on-year inflation running higher than the Fed forecast because of a mild drought and higher food and gasoline prices, perhaps indicative of Fed’s implicit tolerance of higher inflation while maintaining a more stringent explicit and public stance because it has no explicit numerical target in its mandate though it should.
Structural unemployment has no short run cyclical cures unless the Federal Reserve intervenes structurally in accordance with the Federal Reserve Act. We may be witnessing a period of halting easing in cyclical unemployment but not alleviation of the more deeply ingrained structural unemployment, the structural component dominating the cyclical component.
Bubbles of both real and financial assets, as has been the case, in particular, repeatedly since 1997, always exaggerate or inflate the economic value or potential output of any given economic structure. We note here that the Federal Reserve has structurally intervened in the US economy during both the run up to and in the aftermath of all financial crises in the United States and abroad since 1987 when Alan Greenspan took office with the purpose of promoting financial innovation. The panic of 2007-2008 is a departure from the usual Fed practices because, beginning in the Greespan-Fed of 2003, the Fed raised interest rates during a bubble.
We, therefore, see no reason why the Fed should not further intervene structurally after its half-baked Troubled Asset Relief Program (TARP) and Term-Asset Backed Lending Facility (TALF) which were incomplete programs because they focused only on saving the financial institutions. As Tim Geithner, Secretary of the Treasury, is discovering, the recovery of financial markets is not sustainable if real investment does not rise.
Real investment cycles can be long without structural intervention as was painfully discovered during the Great Depression. Given the post-Great Depression amendments to the Federal Reserve Act, the Fed can legally structurally intervene but for the monetary ideologies at play.
In the absence of real structural intervention by the Federal Reserve but zero bound policies for an extended period of time, we see a risk of stagflation in the period 2013-2016 and beyond in the United States because of negative – energy, debt and currency – shocks.