Lift-off. That’s the conclusion to which observers jumped when the government announced on Friday that the economy added 271,000 jobs in October. And that the August and September figures have been revised upward by 12,000. And that the unemployment rate fell to 5 percent. And that discouraged workers and those looking for fuller-time jobs fell to 9.8 percent of the work force, the lowest level since May 2008. And that average hourly earnings in the private sector were up by 2.5 percent from October of last year, the strongest reading since July 2009.
Federal Reserve Board chairwoman Janet Yellen said only a few days ago that the monetary policy committee would likely raise rates if the economy seemed strong enough “to generate further improvements in the labor market.” This jobs report certainly is an early Christmas gift to Yellen, who had been hoping that she would be able to turn her hints about raising rates into actual increases.
It is fashionable for economists to say that a single month is not a trend, which Charles Evans, president of the Chicago Federal Reserve Bank, hastened to point out. But 271,000 is undoubtedly – all right, most probably – the number Yellen has been hoping to see so that she could raise interest rates in December, putting monetary policy on the path to normality before champagne corks popped in the halls of the Fed on New Year’s eve. More than fashionable, it is mandatory for economists to have an “on the other hand,” this one provided by the Lindsey Group. More than all of the increase in jobs was provided by workers over 55 years of age (other groups lost workers) with no college education, meaning younger, better educated workers remain on the side-lines. Bad news for future productivity. We worry so much about the demand for workers that we forget that the economy cannot grow more rapidly if the supply of younger, properly skilled workers is not forthcoming.
Still, markets will be surprised if rates do not go up 0.25 percent when the Fed’s monetary policy committee meets in mid-December. Never mind that the annual rate of increase in inflation has not yet reached the Fed’s 2 percent target – that can be papered over with a vague statement that if the jobs market improves, inflation cannot be far behind, a theory many economists less than plausible. And never mind that it was only a month ago that the Fed was refusing to raise rates because of slower growth and perhaps worse in China; it has since rather regretted tying its decisions to what might be happening in the People’s Republic.
So much for what the Fed is likely to do. Here are some guesses as to the impact of what would be a long-awaited reversal of the monetary policy adopted by the Fed to prevent a major recession from descending into something far worse. The two major drivers of the rather weak recovery have been the auto and housing sectors. Vehicles are moving off showroom floors in record numbers, in part because dealers and manufacturers have been able to offer 72-month loans at very low interest rates – below 3 percent for qualified customers. They might have to tighten those terms a bit, but can easily offset any discouraging effect that might have on potential buyers by increasing what are called “incentives,” price cuts in ordinary English. My guess is that the industry will march into 2016 in good order, scandal-ridden VW excepted.
The effect on the housing sector is a bit more difficult to predict because interest rates on mortgages are only one factor determining the ability of buyers to realize the so-called dream of home ownership. Those rates will start to tick up, although not to historically high levels. But interest rates are having less effect on the pace of home sales than the unwillingness of banks to lend to potential buyers with less than very high credit scores, a policy that has reduced the portion of first-time buyers to levels not seen in many years. Banks have been bloodied by regulators for making loans to borrowers with no prospect of repaying them, triggering the wave of foreclosures that drove the housing market to record low levels, and contributed to the financial mayhem initiated by the collapse of Lehman Brothers. They are not about to risk another round of fines and possible criminal indictments by lending to young, cash-stretched first-time buyers, or others who are not so well off that they will most assuredly meet monthly mortgage payments. In short, the sort of people who have qualified for mortgages during the current recovery are unlikely to be deterred from continuing their hunt for new or bigger homes by a modest increase in interest rates. Besides, the rise in average hourly wages suggests that the labor market has become sufficiently healthy to permit incomes to continue to rise, offsetting any downward effect on demand that higher mortgage rates might have.
Nor is any modest increase in interest rates likely to dampen holiday spirits. The giant Christmas tree that is installed every year at Rockefeller Center in New York arrived on Friday, marking the beginning of the holiday season. Retailers are hiring extra staff earlier than usual, and there are all those iPhones, gadgets, and Star Wars, er, stuff to be bought, houses to be spiffed up, and “experiences” – vacations, spa visits, and the like – to be had. A few stores, T.J. Maxx among them, have decided that they will not participate in the Black Friday mall madness so that their employees can have leisurely, family-oriented Thanksgiving dinners. In part this is a simple display of kindness; in part it is a reflection of a tighter labor market that has many employers raising wages and becoming more sensitive to workers’ demands for more predictable work schedules. But these kindly employers are the exception. Most will open on the Thursday evening before Black Friday in order to accommodate what Brian Cornell, CEO of Target, calls “our guests” -- shoptalk for customers.
All of this puts America on a course far different from the rest of the world. China is easing monetary policy, the European Central Bank is prepared to ease further, the Bank of England has no stated plans to reverse its easy monetary policy. With interest rates here almost certainly headed up, albeit on a very gradual path, the economy strengthening, and congress and the president agreeing to a budget deal that will run for the next two years, it is no surprise that the dollar is strengthening, and will continue to do so discomfiting those exporters for whom that bad news was more than offset by congress’ decision to renew the flow of subsidies they will be receiving from the resuscitated Exim Bank.
All of this unless the next report, due ten days before the final monetary policy committee meeting of the year, sends contradictory signals, proving once again that one month does not a trend make.