Between the Fed and a Hard Place

In our view, it appears as though just about everyone is awaiting Friday’s Employment Situation report with baited breadth: Portfolio managers, Bond traders, Fed Chair Alan Greenspan, and of course candidates George W. Bush and John F. Kerry. Will this be the one that finally meets or beats economists’ consensus?

The range of estimates for tomorrow’s report is exceedingly broad – from a pessimistic 75,000 new jobs, to an optimistic +175,000 (Brian Wesbury of GKST is the outlier at +225,000). Bloomberg Consensus is for 130,000. A self-sustaining, non-inflationary expansion occurs when job creation is beyond population growth: about 200-250,000 per month.

The challenge of the so-called “goldilocks economy” for the stock market – not too hot, not too cold – is staying within the sweet spot. We continue to enjoy the effects of massive stimulus: ultra-low interest rates, falling U.S. currency, increased money supply, tax cuts and deficit spending. And while everyone wants to see improving job creation, the market is well aware that the Fed stands ready to initiate a tightening rate cycle as soon as any signs of inflation appears. Improvement in Employment is one of the signs eventually leading to rate hikes.

Yet from a political perspective, the jobs creation issue remains crucial. At least, according to a recent study by the Pew Research Center which cited Jobs over all other factors. One need only look at an electoral map from 2000 to see why it is so crucial to the 2004 Presidential election.

Zogby International did just that, coming up with a short list of Electoral College swing states. Not coincidentally, many of these states are in the industrial heartland, which has borne the brunt of the manufacturing job losses. In at least 6 of the key states – Minnesota, Missouri, Ohio, Tennessee, West Virginia and Wisconsin – there has been a mixed economic picture: The Federal Reserve Beige Book shows an expansion of Manufacturing Activity in these states, but only anemic improvement in the Employment picture.

The President’s main opponent is not Kerry, but Time. The White House seems to be racing the clock: They need sufficient job creation before November to blunt that as a major issue in the swing states.

What is George W. Bush’s biggest electoral risk? Like his father before him, it may be a belated improvement in the Employment Situation – but one occurring too late in the electoral cycle to help his re-election bid.

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