US economy: Little optimism, but less pessimism

Payrolls up, but unemployment still nudges up close to 10%.  Source:
Payrolls up, but unemployment still nudges up close to 10%. Source:

Jobs expanded in April, with the American private sector back with a vengeance.  But medium-term risks abound, especially regarding very weak public finances at the federal, state and local levels due to the massive economic rescue enacted last year.  Governments at every level in this country must put forward credible deficit-reduction plans, albeit cautiously, or this recovery could falter as early as next year.

Bruce Kasman, Chief Economist of JPM, held a conference call today to go over the US employment figures, released this morning, that showed a huge expansion in payrolls under way over the last three months.  Kasman, whom I remember from my years at the New York Federal Reserve in the early 90s where he was an international economist, explained that the US private sector was hiring, restocking and investing, not out of optimism, but out of “less pessimism.”

Payrolls in the US expanded by 290,000 in April, versus a consensus forecast of 190,000.  Upward revisions of 121,000 to March and February were announced as well.  The private sector, including manufacturing and services, is adding jobs.  The workweek increased in April as well.  Putting this together, this means that labor income (workers’ paychecks) is rising, up 4.2% in in the first quarter of the year.  Further good news is that wage inflation remains muted, as there is considerable slack remaining in the labor market.  So, American consumers will start spending again, and the Fed won’t raise interest rates to staunch inflation any time soon.  Pretty rosy scenario.  With wage inflation muted, profits have been rising, postponing reform of the inherent unfairness in the American economy — firms profit as real wages remain low.

Still, you couldn’t ask for anything better in an economic recovery at this stage.  Kasman said he believed the US recovery has momentum and is broadly based.  The headline unemployment figure did edge up to 9.86% in April, but there was good news in that figure as well.  This figure rose because the labor participation rate rose.  Because not all of those currently counted as participating in the labor market have jobs, the unemployment rate rose, even though jobs themselves expanded robustly in the month. 

Kasman sees self-sustaining economic growth in the coming two quarters of this year as firms and households roar back; however, he is not optimistic about US policy makers taking the right decisions to ensure the economy remains on a sound medium-term growth path.  He also worries about contagion from the debt crisis in Europe, but that will be the subject of my next post!

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