To those watching the economy as it enters into positive territory and the financial markets as they seemed to be getting into gear again, today’s unemployment report suggested that market traders had gotten ahead of the economic curve.
According to the Bureau of Labor Statistics (BLS), September's unemployment rate continued to edge up, from 9.7% in August to 9.8% (close to the politically sensitive mark of 10 %, widely expected by the end of the year). At the same time employment fell, the labor force declined, usually read as a sign that increasingly discouraged workers are dropping out of the active labor force. And the number of hours worked also decreased, typically considered a leading indicator of further weakness ahead. Health care job gains continued to be the only positive note in the report.
Otherwise, economic data for the week was mixed. While other reports (including on manufacturing activity, durable goods and construction) were considered disappointing because they were weaker than forecast, they nonetheless reflected upward trends in economic activity.
What is the outlook for growth? Very respected economists differ, for solid reasons. The consensus view is that recoveries from financial sector-induced recessions are slower than usual, and well-regarded studies are compelling. Moreover, many still consider deflation ithe greater risk. Yet, some eminent economists point out that sharp recessions are followed by sharp recoveries simply due to the compelling arithmetic of the rebuilding of inventories, and that standard economic relationships (including those between inflation and resource utilization) will still hold as the economy revives.
Faced with such uncertainty, what is a responsible policymaker to do? Policy changes usually only take hold with a lag. For monetary policy, the lag is thought to be from 12 – 18 months. Fiscal policy has timing challenges as well. Particularly at turning points, these lags pose enormous challenges. History is full of policy mistakes from the misreading of economic indicators, on the up and down sides.
