Financial Daily from THE HINDU group of publications
Wednesday, Apr 07, 2004
Money & Banking
Industry & Economy - Economy
Columns - Financial Scan
US economy: Inflexion point for jobs?
TREASURY bondholders had a rough ride last Friday. The monthly non-farm payroll data was an unpleasant shock.
The US economy added 3,08,000 jobs in March - close to three times the forecast.
Although the unemployment rate rose to 5.7 per cent from 5.6 per cent, it was the result of more people seeking jobs and an encouraging sign of hope and growing optimism among the unemployed that they could find work.
Economists were hard put to explain the slow tempo of job creation (amounting almost to non-creation), although growth was robust. The second half of 2003 saw GDP increase 6 per cent (annualised), yet it did not translate into falling unemployment. Productivity seemed to be the obvious culprit. It was corroborated by the increasing share of profits compared to wages in factor incomes, which caused the stock market to rise sharply in 2003.
The question was (and is) whether growth is sustainable in an environment of short supply of jobs. After all, consumer spending is two-thirds of GDP. Falling confidence about new job creation and retention, is a strong negative for the average American.
Luckily, economists had a comforting answer. All of them (Mr Alan Greenspan included) thought that productivity was reaching saturation. Companies and businesses would have no choice but to hire to meet rising demand. This belief now seems to have been borne out by the massive and unexpected addition to payrolls last mouth. Employers are, seemingly, at last convinced that good times are here to stay and willing to take the risk of hiring.
For President Mr Bush, the tidings could not have come at a better time. His father's defeat was attributed to "it's the economy, stupid" becoming the issue the 1992 campaign. It looked as though it was to be the nemesis of Bush junior as well.
Yields on 10-year Treasuries topped 4.1 per cent, jumping 20 basis points after the jobs data. There has been no let-up since; Monday's ISM Services index also surpassed projections and the yield rose further to over 4.2 per cent.
The key question is, of course, whether the US Federal Reserve will raise its benchmark interest rate if, say, 2 lakh jobs a month becomes the norm.
Clearly, an improving employment picture is not the whole picture. Inflation is the other critical variable. And if it stays muted as it has for some years now, the Fed is unlikely to think it necessary to ratchet up interest rates all that soon.
Jumps in yields are, therefore, opportunities to lock in good levels to receive.
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