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November 7, 2003
The first October data are in, and mark a change in trend for the economic better. However, the shift is still a tentative affair, and its minor magnitude shows in the slight uptick in mortgage rates, from just below 6.00% to just above.
The headline numbers this morning: payrolls expanded by 126,000 in October, and the Labor Department revised the sum of the August and September figures from flat to a gain of 144,000 jobs.
Earlier this week, the purchasing managers' index (now opaquely re-named "ISM") came in at 57, the best reading in four years, and two points above the false tops in December '02 and January '03.
(Caution on three pieces of "strong" data: inventories have been drawn down, and must be re-built, but changes in inventory levels are a tiny element in today's service-and-electrons economy; second, the rise in commodity prices does not necessarily presage inflation for the same reason. Third, I'm not sure if surging productivity is a sign of health, or of ruinous competition.)
Given this data -- jobs, at last -- why haven't interest rates taken off?
Because the Fed is still grounded, and shows every sign of staying so. Yesterday, Mr. Greenspan released his first economic guidance since spring, and Fed Governor Ben Bernanke spoke also.
Mr. Greenspan's thinking can make electrifying reading, if you don't mind the elliptical Fedspeak. However, this speech was tired and thin, the words of a man waiting for his last sustainable expansion to unfold, about to retire into the glow of unique accomplishment: he became Chairman in a time of dangerous inflation, and has taken us to price stability for the first time in forty years at the trifling cost of two recessionettes, and a stock market bubble not his fault. The only worthwhile line yesterday: "In these circumstances, monetary policy is able to be more patient."
Mr. Bernanke looks more each day to be the front-running heir, in part because he is a magnificent communicator, and the rest because his wish for an inflation target to guide the Fed's operations is also the wish of all right-side economists and politicians, and many on the left. Senior pols have always been uncomfortable with Mr. Greenspan's insistence on a no-rules, my-judgment-only régime, and only his vast competence has let him get away with it.
If you want to understand the "circumstances" referred to in Mr. Greenspan's speech, read Bernanke's. His prose is vigorous and clear. You don't need to study it or disentangle it, like Mr. Greenspan's; just read it (www.federalreserve.gov, full text posted when the speaker steps to the mike).
Bernanke lays it out: what we know and don't know about the job market, qualifies data sources (stick with the DOL payroll number, not the apologists' quibbles), exposes manufacturing-job-loss propaganda (we still make things, in aggregate value more than ever; it just takes fewer people to make them), and disposes of issues that don't matter right now (the current account deficit).
Clear as day: Bernanke's sustainable rate of unemployment is 5% ("Job creation and hiring remain quite sluggish"), and the economy is 3.5 million jobs short of that level. Payrolls growing at October's 125,000/month would barely soak up new entrants to the workforce; it would take 300,000/month sustained growth to make a dent in the employment shortfall, and a year or two or more of that before job growth by itself presented an inflation threat.
Interest rates can't go down unless this expansion falters, but the Fed is nowhere near taking them up. The modest rise in long-term rates this week has more to do with the Treasury selling $57 billion in new bonds next week than any of this "job miracle" trumpeting.
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