That the US jobs report last Friday showed continuing weakness in the labour market is certainly by now far from breaking news. I wouldn’t however want to let it pass by without comment. I think it is now abundantly clear that there is a pattern in all this somewhere (what that pattern is precisely, and what is causing it may be another matter). The US is not creating the quantity of new employment it needs. This means that the output gap (the gap between potential and actual output) is unlikely to reduce, and that the Fed will in all probability be unable to raise interest rates as vigourously as it had anticipated. This is also likely produce downward pressure on the dollar (with a consequent upward pressure on the Euro) and all sorts of other weird and wonderful things which should preoccupy those given to thinking about these matters. I think the debate is effectively over though: this is more than just a ‘soft spot’.
Employers’ payrolls grew by just 96,000 in September in a weaker-than-expected government report that provided a final snapshot before Election Day of a lackluster jobs market.
Friday’s Labor Department report means President Bush will face the electorate with 821,000 fewer jobs in the country than when he took office, though 1.78 million jobs have been added in the past year.
Source: Yahoo News
That continuing labour market weakness in the US will be ‘dollar weakening’ is more or less generally agreed. That the upshot of this would be a stronger euro (the single currency has been nudging up slowly in recent weeks) may seem surprising (given that on many measures the eurozone economy is currently underperforming the US one) but it is in fact a direct structural consequence of the monetary arrangements we presently have.
Some are going somewhat further than suggesting a mere weakening of the dollar as a possibility. The alarm shot was given by Dalls Federal Reserve President Robert McTeer when he declared in a speech in New York last week that whilst overseas investors now “finance” the US current account gap, “theoretically some day that process will come to an end, the flows will turn against us and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar.” This prospect, which currently seems remote, should not be taken lightly. It is real, and it is there. And obviously any rapidly depreciating dollar would bring a rapidly appreciating euro in its wake (at least initially, after that all bets would effectively be off).
So rather than gloating at what might well be seen as an electoral difficulty facing one GW Bush, our financial and political leaders would be better occupied in considering what, if and when this happens, our exit strategy might be.