Economist James O’Sullivan is surprised with the market’s reaction to the latest jobs number from the US.
Of course, 69,000 job additions are far less than his projection of 180,000 jobs for May, but markets have overreacted because of the back drop; there’s too much jitter because of the developments in Europe and not to mention the approaching elections.
The latest number is not that bad if one looks at the long-term trend where the US economy has added 174,000 jobs each month over the past six months. It may not be booming, but it does indicate that the economy is doing reasonably well.
Even the manufacturing ISM reading came in below forecasts, but they are still comfortably in the expansionary region. Though the consensus ISM forecast was above 54, the actual reading of 53.5 still indicates manufacturing is expanding. Also the Orders Index reading were more encouraging at 60.1 since it’s an improvement over April. Nonetheless, the reaction was exaggerated since Thursday’s ADP jobs numbers came in softer than anticipated.
Jim thinks the US is doing much better than Europe which is in deep recession right now. Their PMI numbers indicate a steady decline in manufacturing activities. The developments in Europe will be critical in the coming months and will decide if the single-currency will survive or not.
The unemployment benefit claims numbers didn’t change much and are in the 363,000-373,000 range. The long term jobs number is above 150,000, which indicates that the economy is in the recovery mode, which in turn should bode well for the equity markets.
On being asked about the effectiveness of monetary stimulus measures like the LTRO in Europe, Jim said he had no doubts that they had positive effects on the European economy.
Things would have been much worse in Europe or in the US if the ECB or the Federal Reserve didn’t initiate quantitative easing measures. That being said, liquidity measures in isolation are unlikely to work and lot of structural reforms needs to be taken. The ECB’s measures ensure that there’s enough liquidity in the market, but ultimately if banks are not reformed, the monetary policies are unlikely to work.
The Fed is unlike to press the panic button soon. May’s jobs data is more likely an aberration than a trend—hopefully. However, if the economy falters over the next few months, QE3 very much remains an option. You can watch the video here.
This is only one man’s opinion, and I personally don’t agree with much that is being said. The LTRO has given temporary relief to European banks, which lasted about 3 months.
Years of stimulus packages have not done a thing for structural improvements, and I continue to believe that we are worse off than after the crash of 2008.