Well, its that time of the month: Employment Situation Report for August is due in about 30 minutes. The median forecast is for a gain of 68,000 workers (July was 117,000), and a steady unemployment rate of 9.1%. Bloomberg notes this will be the 26th month out of the last 28 where UE was at or above 9%. The NFP range was a decrease of 20,000 to a gain of 160,000. A last minute downgrade of expectations from Goldman Sachs yesterday had traders on edge.
This report, and the confusion surrounding it, has the potential to be explosive.
Not because its yet more proof of a decelerating economy — we’ve had more than 3 months of data showing a marked slowing in economic activity. The US is not quite at recession levels, but certainly heading towards a sub 1% muddle through growth rate period. No, the potential confusion stands from the Fed, and their reaction to, of concern over, today’s NFP.
We have a somewhat unusual situation with the US Central Bank, which I would define in 6 steps:
1. Is the Fed’s monetary policy still capable of affecting the overall economy? (Are they pushing on a string?)
2. Is the Fed capable of executing such a policy vis-a-vis internal dissenters/inflation hawks?
3. What is the impact of our current dysfunctional state of kabuki theater — is the Fed hamstrung by Presidential / Tea Party politics?
4. Regardless of 1-3, what does the Fed want to communicate to the markets? Will they be talking up markets via a QE bluff?
5. If the NFP data is okay — if it meets consensus — does that reduce the impetus for extraordinary Fed action?
6. If the NFP data is a downside surprise — if it is significantly below consensus — does that compel action by the Fed?
Now, take those questions and balance them against the profit picture. How much will a slowing economy or recession impact profits, which as we discussed yesterday, appear to be nearing a peak? (Former Labor Secretary Robert Reich correctly noted that “The ratio of corporate profits to wages is now higher than at any time since just before the Great Depression.”)
Asked another way, will Fed generated liquidity offset a profit picture that could slow appreciably over the next few quarters?
Employment situation report released at 8:30am