US unemployment: US job losses in May, at 345,000, were sharply lower than in prior months. Meanwhile commodity prices have zoomed up, presaging inflation, and banks look healthier. The rationale for outsized monetary stimulus is wearing thin, and Federal Reserve Chairman Ben Bernanke needs to prepare to reverse it sooner — not later.
The non-farm payrolls data was generally positive. Of the 156,000 fall in manufacturing employment, almost half the jobs were lost from three sectors related to the troubled automotive industry. Significantly, the less bad than expected figures owed little to government hiring — in fact, government employment fell by 7,000. However the accompanying household survey, used to calculate the unemployment rate, was less encouraging. The 0.5 percentage point rise to a 9.4 per cent unemployment rate was steeper than expected, and the jobless rate looks set to exceed the 2009 average of 8.9 per cent assumed in the “more adverse” scenario for the recently-conducted US bank stress tests.
Nevertheless, the declining rate of job losses suggests that a recessionary bottom may be approaching. Bernanke will then need to remove some of his wide-ranging monetary stimulus programmes, to avoid inflation taking hold. With broad money supply, including the so-called M2 measure and the St. Louis Fed’s MZM indicator still some 10 per cent higher than a year ago, although apparently flattening out, there's a risk of inflation as financial activity recovers from the doldrums that have kept price rises at bay.
That may soon happen, with the recent surge in bank stock prices and new equity issues, together with declining money market risk premiums, suggesting a marked improvement in the banking system’s health. Commodity prices are up more than 20 per cent from their February low, while first quarter productivity data showed unit labour costs rising at 3 per cent — both signs of nascent inflation.
Bernanke has delivered a consistent message that the Fed needs to be ready to exit its crisis-driven programmes. Most recently, in testimony to the US Congress on June 4, he expressed confidence that he could remove the monetary stimulus and avoid igniting inflation. To do so, he will need to anticipate the problem, or risk having to tighten drastically, risking a lurch into further recession. His foot should now be poised over the monetary brake.