Is Another Round of Quantitative Easing Coming?

Today was a special Jobs Day Tuesday as the Bureau of Labor Statistics released the September jobs report, which had been delayed due to the government shutdown. It wasn’t very good. Total non-farm payrolls increased by 148,000, which was less than the expected 180,000, while the unemployment rate dropped from 7.3% to 7.2%. The labor force participation rate remained unchanged at 63.2%. The July (-15,000) an August (+24,000) revisions combined for an increase of 9,000 jobs.This report was disappointing, but what’s even scarier is the trend lines.

Here’s the three-month moving average going back to the end of 2011:

3 month moving averageThere’s a pretty good chance that something is wrong with the way the BLS seasonally adjusts the numbers. Every winter has been much better than the following summer, but the trend is still not good. We’re into Obama’s second term and the economy is still barely growing. The reasons for this aren’t clear, but the government likely has a lot to do with it. Sequestration is terrible policy that is taking a chunk out of the economy at the wrong time. Austerity is the last thing we need right now. The expiration of the payroll tax cut at the start of this year is likely having some effect as well. And, of course, shutting down the government and risking a default is about as boneheaded as it gets. Instead of constructing policies looking to get the economy back going, the federal government (read: Republicans) have stood in its way.

The Federal Reserve has been concerned about fiscal policy and chairman Ben Bernanke has repeatedly emphasized that Congress needs to do more. Except that’s never going to happen. The question then is will the Fed do more? The economy is slowing down, not recovering. The FOMC had hinted at tapering in September, but pushed it off due to weak data and the impending fiscal fights. The market had assumed that the Fed was going to reduce its bond purchases regardless of the underlying data. By delaying the taper, the central bank attempted to regain its credibility and prove to investors that it’s data-dependent. Now, this is another test of that credibility.

This was a bad report and the economy is trending downwards. More fiscal fights loom and sequestration will be worse in 2014 than it was this year. Inflation is still running well below the Fed’s 2% target. If the Fed is really data-dependent, it will seriously think about making its policy even more accommodative either through QE4 or another mechanism.. The economy is no longer improving at a moderate pace. It’s slowing and there’s no chance that fiscal policy will help. It’s time for the Fed to pick up the slack.


Did the Fiscal Cliff Hurt the Economy?

Today’s jobs report was decidedly mediocre and unremarkable – the economy added 157,000 jobs in January. The Bureau of Labor Statistics also revised its November and December estimates up a decent bit as well. This seems to rebuke the idea that uncertainty surrounding the Fiscal Cliff held back the economy. After all, we continued to gain jobs at a similar pace as we had during the previous 10 months. The Fiscal Cliff didn’t seem to have a significant effect, right? That’s Matt Yglesias’s take:

With today’s jobs report out, it’s worth remembering that back during the lame duck session, the Fix the Debt crowd was constantly braying about the dire consequences of failing to reach a major budget deal. They said that not only would full implementation of the cliff be a Keynesian drag on the economy but also that fire and brimstone would rain down upon us if markets weren’t assured that Congress has a credible plan to tackle long-term fiscal challenges.

Well, Congress had no plan. They agreed to small tax hikes and a bit of new stimulus via unemployment insurance, randomly kicked the can on the sequester, did nothing to reform the tax code and nothing to settle entitlements. And everything’s … fine.

Not great, mind you. But a January jobs report showing normal growth, no bond market freakout, no interest rate spikes, and some nice upward revisions to data from the lame duck period. Uncertainty didn’t matter. Confidence didn’t matter. Strong fundamentals and decent monetary policy from the Federal Reserve have us on a track for O.K.-but-not-spectacular growth, and you should expect that to continue.

Everything is fine, but that doesn’t mean that the economy wouldn’t be better right now if Democrats and Republicans had come together and agreed on a big deal. Certainly, all the pundits screaming that the world would fall apart if we didn’t get a grand bargain were wrong. We are doing fine without a grand bargain. But that doesn’t mean the Fiscal Cliff didn’t harm the economy. Maybe we would’ve added 300,000 jobs in December and January if we reached a more comprehensive deal.

So, I disagree with Yglesias’s post that uncertainty and confidence didn’t matter. I think they did, even if just slightly, but it’s impossible to know how much they mattered without knowing what the economy would be like in an alternate universe where we had a major deal. Until then, it remains a mystery.