A simple yet overlooked thought in the current debate about the health of the economy, the subprime credit virus and the proper role of Federal Reserve monetary policy is this: You don’t have credit blowups, liquidity freezes, dysfunctional commercial paper markets, suspect bank loan quality – nor do these ailments spill over into London and European money markets – when central bank policies are easy and accommodative.
Financial panics and overly stressed markets are symptomatic of tight and restrictive money. In other words, the current story of financial fear, trembling and high anxiety is itself a critically important signal that money is way too tight.
A jobs report released in early September pounds this point home. The unexpected loss of 4,000 corporate payroll jobs (the first drop in four years) plus a very unsettling 316,000 drop in the household jobs survey is consistent with the recent shocks to our financial system.
So were the 81,000 downward revisions to the prior months’ of June and July. Incidentally, the only reason unemployment held firm at 4.6 percent is a 340,000-drop in the civilian labor force. This undoubtedly signals worker discouragement and declining labor morale.
After President Bush slashed tax rates four years ago, many of us argued that the rising household survey of jobs gains was a good leading indicator of more work and lower unemployment. We were right. Both the payroll and the household surveys produced eight million new jobs, while the unemployment rate dropped from 6.3 percent to 4.5 percent. That said, year-to-date the monthly change in household employment is actually falling by an average of 16,000. This is a big negative and does not bode well for future job tallies.
There are some saving graces to the economic story. Recent numbers from the Institute of Supply Managers show an expanding economy in manufacturing and services. Same-store chain sales came in above estimate for August. Personal incomes after tax and after inflation are still rising by 3.8 percent for the 12 months ending in July.
Silver linings aside, the commercial paper market for short-term business loans continues its deep south migration with an almost unprecedented $300 billion evaporation.
If businesses are unable to access working capital to fund their daily needs, then these firms will be forced to shrink their operations. That means layoffs.
American companies are already experiencing their first profit decline in more than five years. Non-financial domestic corporations have experienced negative profit margins and falling profits over the past three quarters. Treasury Department tax collections from business income have fallen off a cliff.
Corporate tax revenues fell 29 percent in August compared to a year ago. And these corporate tax collections have now dropped in three of the past four months. A year ago, they were rising by more than 20 percent.
So while big companies are still benefiting from overseas-based profits, the domestic story is rapidly deteriorating. Moreover, it’s a safe bet that the financial sector will deliver downside surprises as today’s mortgage mess continues to unwind.
Fortunately, financial panics don’t occur very often. But what we have before us today is a modern version of the old-fashioned run on the bank. The only difference is that the bank today is the global money market.
The Fed can fix this. But they better get moving.
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