BY: Jeff Macke
This month’s edition of the Most Important Number Ever is out, and the headlines look good. The Bureau of Labor Statistics’ Employment Situation Report, commonly referred to as Non-Farm Payrolls, showed that a total of 163,000 jobs were added to the economy in July. While the headline looks great, there are some issues under the surface as the unemployment rate ticked up to 8.3% and total jobs added for June was revised from 80,000 down to 64,000.
The stock market seems to love the report, but Dan North, chief economist at Euler Hermes cautions against breaking out the party hats just yet. “We need 200,000 or 250,000 jobs a month to start bringing the unemployment rate down,” North says. “These numbers peaked last January, and it’s been a trend downward ever since.”
It’s the worst-kept secret in the financial world that bad news is good for the stock market this year. The darker the picture, the more likely it is that the Federal Reserve will come to the rescue — or at least prop up asset prices — with another round of quantitative easing. If the data aren’t good enough to mark an improvement, stock market participants would just as soon see numbers bad enough to justify Fed intervention.
North says Bernanke already started signalling QE3 with Wednesday’s FOMC statement on rates and will hint even more brazenly at the central bank’s annual gathering in Jackson Hole at the end of the month. Assuming the numbers remain grim, North thinks Bernanke is going to finally launch the endlessly discussed easing program at Fed’s regular meeting on September 13.
“Why would I wait?” says North, putting himself in Bernanke’s shoes. The economy is getting worse. Any actions will take the better part of a year to have an impact, and any hopes for a fiscal policy are going to have to wait until sometime in 2013. The answer to North’s rhetorical question is, obviously, Bernanke would wait because there’s a Presidential election less than two months after the September meeting. Any action by the Fed so close to November would likely hand the election to the President.
Dismissing out of hand the notion that the Fed is apolitical, North notes that Bernanke’s term ends in January, at which point he’ll either be re-appointed or out of work. “Certainly Bernanke will want to have made a positive move if he believes Obama’s going to be President again.”
Economically speaking, North is right in that QE3 is unlikely to succeed where QE’s 1 and 2 failed. In terms of stocks, history would suggest just the opposite.