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Fed Up: Central Banks Will Always Be Political Pawn

Fed Up: Central Banks Will Always Be Political Pawn

By    |   Friday, 03 May 2019 03:25 PM

The employment situation report showed unexpected strong gains that has brought the unemployment rate down to 3.6 percent in April by declining by 0.2 percentage points since March.

This was the lowest unemployment rate since December 1969. Over the month, the number of unemployed persons decreased by 387,000 to 5.8 million.

The overall jobless rate, including those who were marginally attached or working part-time for economic reasons, remained unchanged at 7.3 percent, the lowest level since March 2001.

In April, average hourly “earnings” for all employees on private nonfarm payrolls rose by 6 cents to $27.77. Over the year, average hourly earnings have increased by 3.2 percent. Please take note not to confuse the “earnings” data with the “labor costs” data that were released yesterday and that are mentioned hereafter.

The change in total nonfarm payroll employment for February was revised up from +33,000 to +56,000, while March was revised down from +196,000 to +189,000. With these revisions, employment gains in February and March combined were 16,000 more than previously reported.

No doubt, these are very good numbers overall and should be positive for U.S. equity markets as inflation remains under control.

Nevertheless, it’s also worth noting that investors as well as economists are apparently getting a little bit complacent about the employment situation in the U.S.

The strength of the U.S. labor market is proving to be a very strong foundation for U.S. economic growth. There is little evidence of this situation changing any time soon.

In the meantime, nonfarm business sector labor productivity increased 3.6 percent in the first quarter of 2019, while unit labor costs in the nonfarm business sector decreased 0.9 percent and increased 0.1 percent over the last four quarters, which was the lowest four-quarter rate since a 1.7-percent decline in the fourth quarter of 2013.

Besides all that there are still a few things that are worth looking at in the data.

The changes in the participation rate declined by 0.2 percentage point to 62.8 percent in April but was unchanged from a year earlier. The employment-population ratio was unchanged at 60.6 percent in April and has been either 60.6 percent or 60.7 percent since October 2018.

Labor participation in the United States coming in at 62.8 percent, down from 63 percent in March, remains very low compared to other advanced economies.

Someone is more likely to have a job in Europe than he or she has in the U.S. these days.

While maybe overlooked in the noise around today’s strong employment report, the ISM “Inventories” Index that was released on Wednesday registered 52.9 percent in April, which was 1.1 percentage points up from the 51.8 percent reported for March and made it the 16th consecutive month of expansion albeit at marginally higher rates compared to the previous months.

Accelerations in private inventory investment played quite an important role in the first quarter’s GDP growth rate this year.

Investors could do well keeping in mind that these numbers are likely to be revised several times with the first revision coming on May 30.

Stephen Moore has decided to withdraw his candidacy as President Donald Trump's pick for a seat on the Federal Reserve board.

Financial markets had been getting concerned about the independence of the Federal Reserve’s policy as Trump seemed to have favored candidates who were more politically qualified than economically qualified.

However, for investors, it would be unwise to assume that attempts to politicize the central nanks will now end. There are still vacancies at the Federal Reserve and there is no idea who will be nominated to fill the vacancies.

Moreover, there is a challenge to central-bank independence more generally in the global economy.

Central banks are victims of their own success having managed to bring inflation down to low and stable levels.

Unfortunately, some politicians, not all, have rather quickly forgotten how hard that has been to achieve and, indeed, what damage inflation can do and has done.

All by all, so far at least, my preference for investing in the U.S. hasn’t changed at all. Yes, it’s still a good place to be invested.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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For investors, it would be unwise to assume that attempts to politicize the central nanks will now end. There are still vacancies at the Federal Reserve and there is no idea who will be nominated to fill the vacancies.
central, banks, political, pawn, fed, trump
Friday, 03 May 2019 03:25 PM
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