October 18, 2013
The cure is the nightmare
The September Employment Situation report normally published by the U.S. Bureau of Labor Statistics has become part of the collateral damage from the Washington shutdown.
It would be informative to have numbers on how badly the government financing imbroglio is affecting the economy. But the shutdown itself has cut off the flow of data.
This is just one of the many ironies rendering the current situation so difficult to understand.
In the absence of government statistics, we must therefore turn to the private sector.
This is somewhat reminiscent of when postal workers used to strike regularly, opening the door for courier services to expand their operations exponentially.
One well-known alternative source of private sector employment information comes from ADP Inc. (i.e., Automatic Data Processing Inc.), based in Roseland, N.J. The company bills itself as a leading provider of business outsourcing and human capital management solutions.
In collaboration with Moody’s Analytics, ADP bases its findings on the payrolls of its own huge client base.
In September, U.S. private sector employment improved by a net 166,000 positions, although that was before the serious spillover effects of public sector furloughs became more prevalent.
The economy appeared to be moseying along on a friendlier and more engaging scenic route.
Most of the increase (+147,000) occurred in the service-providing sector, with the difference originating from goods production (+19,000).
The major month-to-month changes in specific sub-sectors were: trade, transportation and utilities, +54,000; professional and business services, +27,000; construction, +16,000; manufacturing, +1,000; and financial activities, -4,000.
Small businesses (1 to 49 employees) added 74,000 workers. Medium-sized firms (50 to 499 employees) hired 28,000 more employees. And large enterprises (500-plus) upped their payrolls by 64,000.
Unfortunately, none of this will mean anything if Washington can’t straighten out its budget dilemma.
In August 2011, the rating agency Standard & Poor’s lowered U.S. government bonds to one rung below Triple-A status. Subsequent events have made it clear this was the right decision.
S&P’s argument at the time was that a major fissure had cracked open between the House on the one hand and the Senate and President on the other and it wasn’t likely to be re-sealed in the usual give-and-take manner.
Compromise had all but disappeared. The business of government was too often being brought to a standstill. There were no assurances that brinksmanship wasn’t about to become standard fare on the menu.
Lo and behold, that projected outcome has truly come to pass.
Even the current bi-partisan solution being offered by the Senate sets out a temporary fix that will last only several months.
Fitch has now entered the fracas with a U.S. credit watch of its own. Once invoked, such a measure isn’t easily dismissed. Fitch’s warning will stay in place at least through the first quarter of next year. It’s been two years since S&P’s downgrade, or more than 800 days, a fact often highlighted on hostess Erin Burnett’s dinner-time OutFront television show on CNN.
Only Moody’s rating agency among the Big Three has yet to adopt a more cautious stance.
Canada’s own Dominion Bond Rating Agency (DBRS) — fourth-ranked behind the majors — has taken the extraordinary step of placing U.S. debt under close observation.
The problem isn’t that the U.S. can’t raise the money to pay its bills. At this specific point in time, it’s human frailty that is standing in the way.
Amidst all the sound and fury emanating from Washington, there is a logical inconsistency that is distressingly absurd.
Due to concerns over the cost of the nation’s social safety net, conservatives are adamant that a stand must be taken now if the U.S. is to avoid default at some date in the future.
The means by which they are choosing to achieve their goal is to adopt a course of action that may very well lead to default imminently.
Reduced to its essence, the cure is the nightmare.
It’s akin to pre-emptively killing a herd of cattle because one day there might be an outbreak of mad cow disease.
Steps can be taken between now and a future hypothetical date to reduce the likelihood of the imagined disaster from occurring.
Mile-high human barriers have been erected preventing the U.S. government from managing properly.
Washington may be forced to allocate its expenditures between domestic recipients (e.g., government contractors and senior citizens) and foreign claimants (i.e., creditors).
Sticklers for accuracy may suggest the word “default” should only apply if loan repayments aren’t made.
But not meeting other funding commitments would also be “default”, regardless of the labeling.
Failure to meet domestic obligations will force layoffs, lift the unemployment rate, cut consumer spending and cause a contraction in gross domestic product (GDP).
Failure to meet foreign obligations will cause a retreat from U.S. bonds, lower the value of the greenback and force the Treasury to hike interest rates.
A falling U.S. dollar will have ramifications for the domestic economy through raising the price of imports. The higher interest rates will inhibit borrowing and damage housing demand.
The harm done to the world economy will negate the benefit to U.S. exporters from the lower-valued greenback.
Chinese authorities are already “sermonizing” about the need for the global marketplace to reduce its reliance on the U.S. dollar.
This won’t happen overnight. The greenback is far too entrenched as the world’s reserve currency to quickly lose its number-one position.
Shifts are underway nonetheless. International holdings of the Canadian dollar have been on the rise.
According to the International Monetary Fund (IMF), the loonie now ranks fifth behind the greenback, Euro, pound and yen.
Escape from the U.S. dollar would most likely cause more foreign currency holders to seek out the loonie.
Battered by the maelstrom raging next door, this might at least enable our government in Ottawa to keep Canadian interest rates relatively low.