The Hindu Business Line : Tepid job growth will slow Fed

EXCEPT the meetings of the Federal Open Market Committee (FOMC), which sets US interest rates, no other event evokes as much interest (even suspense) as non-farm payroll, released on the first Friday of every month.

The report is all about jobs - the cornerstone of the well-being of the US economy. Last Friday, markets awaited, as usual, December's employment data with bated breath. The consensus forecast of economists was job creation of 1.75 lakh.

In the event, the figure came in below expectation at 1.57 lakh, undershooting the forecast by 18,000, but was still pretty much on target, considering that for the past several months, the pundits' predictions were way off the actuals. Markets didn't like the headline statistic.

The dollar fell and bonds rose on the cue. But as the previous month's figure was revised upward from 1.12 lakh to 1.37 lakh - a gain of 25,000 - and more than offset the 18,000 shortfall in December, they took heart, the dollar rallied (bolstered also by Treasury Secretary Mr Snow's comments that there is no change in the `strong dollar' policy) and bond yields rose.

Nonetheless, things are not hunky-dory.

The unemployment rate is stuck in the 5.5 per cent range. In contrast, the Clinton years saw it dip below 4 per cent, in what now seem to have been golden years for the US economy. Jobs have a lot of catching up to do.

The US needs over 2 lakh new jobs every month to force down the unemployment rate significantly. The drivers just do not seem to be there. Most industries are saddled with excess capacity.

In any case, almost anything and everything can be made more cheaply in the Third World.

2005 has begun with an end to textile quotas. And the outsourcing phenomenon is set to gather pace in the coming years. Thus, job growth in the coming months could be unexciting, averaging 1-2 lakh, with the risk of the numbers being closer to the low end, despite GDP growth of 3.5 per cent or so.

The tepid employment picture could, in course of time, put the brakes on the Fed. Most economists think the FOMC will continue to raise rates till they reach 4 per cent. At the moment, the Fed concurs.

In fact, the minutes of the December meeting (which were released last week) state that the current level of interest rates is not consistent with the goal of stable inflation.

Still, if the jobless rate does not move appreciably downward and inflation is benign (as is likely), there could be a pause in the Fed's upward push. Look for it to happen in the 2.5-3 per cent range.

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