The April jobs number was not only disappointing but it embarrassed some people and their predictions. Wall Street was looking for 220,000 new jobs for the month of April and Goldman was even more aggressive looking for 250,000 – the actual number was 160,000. The bond markets reacted by placing a 35% chance that the next move up in interest rates will take place in December of this year.
On May 12, first time jobless claims were reported at just under 300,000 a 14 month high. The first-quarter Gross Domestic Product (GDP) showed an annualized rate of one half of 1%. At this level for the first 90 days of 2016 the economic growth was about three hundreds of 1% per month, almost negligible.
Some economists are wondering if the Fed will reduce interest rates or even turn to negative rate to stimulate the economy. Currently the Fed has 25 basis points in its pocket that it can use to try and change behavior. I would suggest that money is already incredibly cheap when you look at interest rates. Why would a business want to borrow money, regardless of how cheap it appears, if they can’t make enough to cover the cost of borrowing and make a reasonable profit?
CNN Money estimates that institutions and corporations have in excess of $2 trillion that they have not brought into the United States because we have some of the highest corporate tax rates in the world. The responsibility of management is to their shareholders and to make decisions in the best interest of those shareholders. Until returns accelerate above the cost of money don’t look for corporations to borrow money or expand their businesses in the United States.
More and more economists are becoming concerned about the outlook for the next 12 months, many of which are becoming negative about the prospects for the American economy. In a report issued in mid April the International Monetary Fund (IMF) lowered the Global economic outlook to 3.2%. They cited two factors in making their adjustments: first is the decline in growth in China, and second are low oil prices.
Last August the Wall Street Journal estimated that oil companies would loose $4.4 trillion in revenue if oil prices stayed in the current trading range through the end of 2017. UPI reported on May 12 that they estimate that nearly 350,000 jobs have been lost in the energy sector on a global basis. Data from Houston based Graves and Company have put the layoffs in the US in excess of 100,000 jobs and growing.
It seems to me with all the negative headwinds it will be difficult for the economy to recover on its own, to an annualized GDP in excess of 2.5% anytime soon. That 2.5% number is from the Fed itself; it is their target for a growing the US economy. So what options, if any, does the Federal Reserve have to get the economy growing again? The honest answer is, “none”. They have expanded the balance sheet to over $3 trillion, they have cut interest rates to zero, and now there is talk that they may adopt the Japanese central-bank program of negative interest rates.
In the past if you bought a government bond you were paid interest every six months. Under a negative interest-rate policy you will lose money every six months because you will not be paid interest, and you will have to pay the government a fee to hold your money. Warren Buffett at his most recent shareholders meeting said, “ If the banks are going to start charging me money to keep my money in the bank I will take it out.”
The real danger is that if the economy continues to falter, businesses will begin to see less and less opportunity to make money and will no longer be able to justify keeping the employees at the current staffing levels. As a result we may find unemployment starting to rise. I’m not suggesting that we will go back to the Great Recession levels but I do believe that unemployment rates could go to 8 to 9%.
If we look at the current state of affairs then acceleration in unemployment could be devastating to millions of American families. Michael Snyder wrote an article on April 20, 2016 that had a headline of “47% of Americans could not come up with a $400 cost for an emergency room visit.” The basis for Michael’s article was an article that appeared in the Atlantic titled. “The secret shame of middle class America: and was authored by Neil Gable and is based on facts from the Federal Reserve. If the economy goes into contraction more people, I believe, will fall into this category.
With an economy that is two thirds based on consumer spending another recession would see a dramatic drop in consumer spending. With fewer people not having discretionary dollars to handle the $400 expense, there will be less money to be spent to drive the economy. One last number from Mr. Gables article, which I found to be a astounding is that 71% of Americans are concerned that they have enough money to cover their household expenses.
If workers and management see diminished prospects for themselves, their companies and the country, then lower interest rates will not solve the problem. The only way to solve the problem is to turn loose the great entrepreneurial spirit of America, by reducing regulations and taxes, and creating opportunities for capital formation to expand the American dream.
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