Worldly Wise: To lose momentum, you need to be moving

The post-mortems on the July employment report made me realise I'd missed the recovery.

While I was watching my garden grow, the US economy "lost momentum," according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.

One TV news moderator bemoaned the fact that businesses added 71,000 jobs in July compared with the 83,000 experts had expected, as if an additional 12,000 jobs would have made the difference between Dow 10,654 (Friday's close) and Dow 11,000.

The jobs count isn't an exact science, and the Bureau of Labour Statistics says as much in a technical note accompanying each and every employment report. The "confidence interval" for the monthly change in private non-farm employment is plus or minus 97,000, according to the BLS.

The bottom line

What that means is, for a reported increase of 50,000, there's a 90 per cent chance the actual change would range from minus 47,000 to plus 147,000. This year, only the March and April private payroll increases of 158,000 and 241,000, respectively, are large enough to qualify as clear-cut gains.

When you throw in problems associated with seasonal adjustments and assumptions about new business formation, the BLS' birth/death model is relatively new and has little history at turning points, one can't draw any conclusions from two months of data.

In order to lose momentum, the US economy has to have momentum to begin with. If it had any, I missed it.

What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still it has no real muscle.

Inventory restocking isn't a strategy for long-term growth. It's an adjustment to the dramatic drawdown in 2009. It's done, unless businesses and consumers are interested in investing and spending.

Inventory accumulation accounted for more than half of GDP growth in the fourth quarter, three- fourths in the first quarter and a little less than half in the second quarter.

The Federal Reserve's near-zero per cent interest rates and $2.3 trillion (Dh8.44 trillion) balance sheet, almost three times its pre-crisis level, haven't translated into growth. Banks are holding $1 trillion in excess reserves in their accounts at the Fed.

Lower interest rates

If policy makers want those reserves to be fruitful and multiply, they could lower the interest rate they are paying on reserves (currently 0.25 per cent) or stop paying interest entirely. That's just one option Fed officials will, or should, consider when they meet.

For all the talk about quantitative easing, there is no Q in the Fed's econometric models, according to Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and a former director of monetary affairs at the Fed board. Instead the models are based on P (prices): the current and future expected short rate.

Putting reserves into the banking system has an effect on interest rates and is a channel for policy, Reinhart says.

That's a "different world view" than the one held by monetarists, which involves getting those reserves into the banking system.

On the fiscal front, the government and homes. And it paid banks to modify mortgages.

The government is prolonging the adjustment by throwing good money after bad in housing, preventing prices from falling to levels that would encourage buyers. That's one kind of momentum we can afford to lose.