Friday, January 09, 2009

7.2 Percent Unemployment Is Not the End of the World

December’s terrible jobs report, featuring a 7.2 percent unemployment rate, a 524,000 loss of payrolls (actually 678,000, with downward revisions to the prior two months), and an 806,000 drop in household jobs virtually suggests a never-ending recession. However, the future may be rosier than the past.

A series of market-price indicators suggests a bottoming economy that may gradually rise in the months ahead — believe it or not.

In the money and credit markets all manner of Treasury swaps spreads and short-term interest rates are declining. In other words, the credit freeze is thawing. Corporate bond rates are coming down. The LIBOR rate is way down. And commodity indicators are coming off the bottom. This includes oil, gasoline, the Dow Jones-AIG Commodity Index, and the Baltic Dry Index.

So the intense deflation that has marked this recession appears to be coming to an end. Undoubtedly this can be traced to the massive money-creation by the Fed which began in September and will start to show up in the economy this spring at the latest.

Meanwhile, one bright spot in today’s jobs report is wages. Average hourly earnings continue to rise at a 3.7 percent pace over the past year and a 4.2 percent rate over the past three months. Inflation is near zero as a result of plunging retail gas prices. So the tax-cut effect from falling energy and overall inflation will continue to support rising consumer spending.

The message? An unemployment rate of 7.2 percent is not the end of the world. It’s not a high point, but it’s also not the apocalypse.

And finally, in one of the most predictable events of the year, House Speaker Nancy Pelosi is calling for an immediate repeal of the Bush tax cuts — running counter to Obama’s deferral of those tax-cut rollbacks. Over in the Senate the natives also are restless. Kent Conrad, John Kerry, and Ron Wyden oppose all the Obama tax cuts. They want more FDR/Keynesian spending increases. Talk about running true to form.

As I mentioned in my column yesterday, there is a tiny bit of Reagan in the Obama plan. But the congressional Democrats don’t want any Reagan at all.