The future of the recovery is still in doubt, and it all depends on which economic doctrine comes out on top on November 6th.
Today’s jobs data from the Labor Department were disappointing but not a disaster — at least not yet. The creation of 115,000 jobs is not adequate to bring the unemployment rate down consistently. The drop in that rate to 8.1 percent had to do with people leaving the workforce, not the creation of an adequate number of jobs. Contrary to what is widely written, however, the numbers do not necessarily mean the economy is slowing down. There is probably now a problem with the seasonal adjustments. Something has changed, and the most likely culprit is the warmer-than-usual weather.
The seasonal adjustments probably inflated the data on growth earlier in the year and are probably deflating it some now. We are likely growing at a pretty even pace, not slowing down significantly. Let’s not forget that recoveries do have a momentum of their own, and manufacturing is making something of a comeback. There is also some notable rundown in consumer leverage.
This is good news, but not good enough. The pace is still too slow. By now we all know about the headwind of consumer debt and lack of adequate mortgage relief. That leverage is not being diminished fast enough, and it is likely as the Obama stimulus fully peters out that there will be ongoing government contraction — especially as state and local governments continue to cut back.
It would be nice to see Washington pay some attention to this potentially serious weakness — along with two other factors. The first is continued recession in Europe, which in turn will weaken its finances further. Austerity has been the disaster we long warned about. The U.S. sells to Europe and it owes us money, not least our money market funds.
Second, a bunch of significant contractionary policy matters come to a head at the end of the year. The Bush tax cuts end, as do emergency unemployment benefits, the payroll tax cut expires, and Congress is supposed to implement $1.2 trillion in spending cuts because the Super Committee failed to agree on its own cuts.