Phillip L. Swagel
Senior Fellow; Professor, University of Maryland School of Public Policy
Banking and Capital Markets and Global Economy and Public Policy and Real Estate and Regulation and U.S. Economy
Dr. Phillip L. Swagel is a professor at the University of Maryland School of Public Policy, where he teaches classes on international economics and is an academic fellow at the Center for Financial Policy at the university's Robert H. Smith School of Business.
read bio
Employment data present a conundrum for the Fed
By: Phillip L. Swagel
August 02, 2013

TodayaEUR(TM)s jobs data and WednesdayaEUR(TM)s GDP data present a conundrum for the Federal Reserve. The U.S. economy is recovering, but the pace of growth and job creation are far from robust. It is not clear that the recovery is strong enough for the Fed to begin to taper its quantitative easing purchases aEUR" the first step in moving away from the extraordinary monetary policy itaEUR(TM)s kept in place over the past five years.

This weekaEUR(TM)s data were good but not great. GDP growth of 1.7 percent in the second quarter of 2013 was an improvement from the 1.4 percent pace of the previous four quarters, but is still too modest a growth rate to drive more vigorous job creation than the 150,000 to 200,000 gains of recent months.

The unemployment rate fell in July and jobs were added, but the details are weaker than the headline might imply. The lower unemployment rate resulted in part from a decline in labor force participation, and a large part of the job gains appear to have been part-time. People who left the labor force during the Great Recession would be expected to look for jobs again as the economy improves and puts upward pressure on the unemployment rate. People out of the labor force do not count as unemployed but do once they start to look and before they actually find a job.

The 162,000 jobs added in July were a good sign, but figures for the previous two months were revised downward by a total of 26,000 jobs. Average hourly earnings and the average workweek both declined in July, again indicating underlying softness in job creation.

The Fed started its third round of quantitative easing in September 2012 because of the still-weak state of the labor market. As he said in August 2012 at the Kansas City FedaEUR(TM)s annual Jackson Hole economic conference, Fed Chairman Bernanke saw a grave economic danger from long-term unemployment. With fiscal policy apparently stalemated between the two parties, Bernanke saw monetary policy as the only mechanism for boosting the economy, and saw little sign of inflationary pressures. These conditions are still in place to some degree. The recent GDP data indicate that any fiscal drag from the sequester and tax cuts that took effect at the start of 2013 were offset by improving private sector spending. But there is still the possibility that the fiscal policy stalemate between the political parties will lead to a problem in the fall, such as a government shutdown or worries over a debt default.

Financial markets appear to be frothier with more covenant-lite loans and the like, but the Fed seems to believe that regulators can address these issues.

Finally, the Fed will not want to reverse course once it begins to normalize monetary policy. The past five years have seen recurring false dawns aEUR" when the U.S. economy seemed poised to break out into sustained growth and job creation aEUR" only to fall back into the doldrums. One need only remember the administrationaEUR(TM)s vaunted aEURoerecovery summeraEUR? of 2010.

The modest pace of the U.S. economic recovery is frustrating, including for the Fed. With these factors in mind, the Fed seems likely to wait beyond September before beginning the QE taper.