The US economy has slowed markedly over the past several months with only 145,000 jobs added in April and May combined. The June Employment Situation released this morning by the US Bureau of Labor Statistics was more of the same. Another month of weak job growth. The 80,000 jobs created in June fell short of even the low expectations. A combination of the very weak 80,000 jobs added in June and the evidence of a contraction in manufacturing sets the stage for the US Federal reserve to follow the ECB, Bank of England and China’s efforts to pump up their economies using monetary policy.
The US economy added 80,000 payroll jobs in June, with 84,000 coming from the private sector, and 4,000 government jobs lost. While the Purchasing Managers Index indicated that economic activity in the manufacturing sector declined in June for the first time since 2009, employment in the sector increased by 11,000 jobs. Outside of manufacturing, service providing sectors added 71,000 jobs in June with the largest increases coming in the Professional and Business Services sector (+47,000).
The household survey showed employment increased a little more in June (up 128,000), just enough to keep pace with the increase in the labor force, leaving the unemployment rate unchanged at 8.2 percent. Yet the broader measure of labor underutilization (U-6) increased a bit to 14.9 percent.
[Missing Interactive Figure Goes Here]
Today’s report and the forthcoming 2nd quarter GDP release are priming the pump for the Federal reserve to announce additional easing when they meet at the end of this month. But not all of the news has been bad. We have seen strong data on sales of new vehicles, and the construction industry is continuing its slow recovery. Private residential and non-residential spending (in current dollars) is up 17 percent and 30 percent respectively from their low points in 2011. And gasoline prices are down more than 50 cents per gallon since early April. So why should the Fed act now?
The Federal Reserve’s dual mandate is spelled out in The Federal Reserve Act–
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
For the first six months of 2012, the US economy has added roughly 100,000 jobs fewer than the same period in 2011. At this pace the US economy would add only 1.9 million jobs in 2012. Yet even with headline unemployment at more than 8 percent and the broadest measures of labor underutilization at almost 15 percent, the Fed announced only an extension of operation twist at the last FOMC meeting in June. And this was the same meeting where the FOMC predicted that the unemployment rate would decline less than previously thought to only 7.5-8 percent next year, and to 7.0-7.7 percent by 2014. Aggressive action by the Fed is called for, and I expect that come August 1, we will at least see a down payment in the form of a new round of quantitative easing.
– Carl Bonham