RIYADH, 6 September 2004 — Just when we thought that the US economic recovery has hit a soft patch in the second quarter of 2004, the positive job creation number for August throws us into confusion. It was only last week that the US Commerce Department revised its 2nd quarter GDP growth number from 3 percent to 2.8 percent, after three quarters of growth averaging over 4.5 percent.
Other negative indicators in recent weeks include: The consumer confidence index, which fell from a revised 106.1 in July to 98.2 in August (the market was expecting 103.4); a plunge in home sales (new homes down 6.4 percent; existing homes down 2.9 percent); and a rise in new weekly jobless claim to 362.000 from 343,000 the week before (vs. market expectation of 340,000).
The August ISM index also fell 3 points to 59, the first reading below 60 since last October, ending the longest run of 60+ readings in over thirty years! And, of course, one of the biggest negative sentiments in the past few months has been global equity market. All these negative indicators took a back seat this week to the much-awaited August job number, released on Friday.
The US Labor Department reported that 144,000 new jobs were created in August in the non-farm sector, slightly below market expectation of 150,000. Even more interesting was the upward revision to the previous two months’ numbers. The July number was revised up from a paltry 32,000 to a more respectable 73,000 and the June job creation number was revised up from 78,000 to 98,000.
Overall, the US economy has created 1.7 million net new jobs since August 2003. Both President George W. Bush and his Democratic challenger, John Kerry, found support in these numbers. Bush said that his tax cuts were responsible for the jobs, while Kerry pounced on the fact that there are still about one million fewer people on payroll since the time Bush took office!
Regardless of the political importance of these numbers, the key question is what do we make of this apparent disconnection between the positive job numbers and the other soft indicators? And, what does it say about the direction of the Fed’s interest rate policy? Although this is not a surefire answer — many analysts would disagree with it — one can begin to make some sense if we note that job creation is usually a lagging indicator of growth while financial markets and consumer sentiment are considered leading indicators.
Thus, employment starts picking up after an economic recovery has started, while financial markets tend to signal any softness before it comes.
So, if we put two and two together, the rise in job creation maybe reflecting the headwind from three quarters of strong growth till 1st quarter 2004, while the negative sentiment in global financial markets and consumer confidence since March 2004 maybe suggesting a slowdown in its wake.
If so, the Fed may not want to raise rates too fast in the coming months. A 25 bps rise in September, as per the Fed’s “measured pace” may be too soon too fast.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)