US jobs relapse raises fresh doubts on Fed tightening

Long-feared turning point in the global monetary cycle may be delayed yet again, offering another reprieve for dollar debtors across the world.

By Ambrose Evans-Pritchard, in Washington

7:38PM BST 01 May 2015

Blue collar worker wearing American flag patch

The labour participation rate is still at a 37-year low of 62.7pc Photo: Alamy
A key indicator of manufacturing jobs in the US has dropped to its lowest level since the financial crisis as industry remains stuck in the doldrums, dashing hopes for a swift rebound after the economy ground to a halt in the first quarter.

The surprisingly weak data greatly reduce any likelihood the US Federal Reserve will raise rates in June for the first time in eight years, once again putting off the long-feared turning point in the global monetary cycle and perhaps offering another reprieve for dollar debtors across the world.
The closely-watched index of the Institute for Supply Management (ISM) remained anaemic in April, confirming fears that the strong US dollar and energy crash in the once-booming shale states are taking a serious toll.
The employment component dropped sharply to 48.3, below the “boom-bust line” of 50 and the lowest in almost six years. The relapse is likely to set off alarm bells at the Fed, where chairman Janet Yellen pays very close attention to the labour market.
Overall manufacturing output failed to pick up as expected, remaining at a two-year low of 51.5, and looks too weak to power a full recovery in the second quarter.

ISM jobs index

There is now a clear risk that the US economy may slow to “stall speed” under the Fed’s model, defined as a “slow-growth phase at the end of expansions before falling into a recession”.

This would be ominous at a time when the developed world has yet to shake off the legacy of the Lehman crisis, is struggling with record debt ratios and has already used up most of its fiscal and monetary ammunition. This time the “Bric” nations - Brazil, Russia, India and China - are also in trouble, and cannot easily step into the breach with fresh stimulus.

There is now a clear risk that the US economy may slow to 'stall speed'

A separate report by Markit found that US manufacturing output in April fell to its lowest level this year, depressed by declining exports.

Markit’s Chris Williamson said the survey follows a “growing clutch of disappointing numbers” that will force the Fed to hold back until a clearer picture emerges.

“Any policy tightening looks likely to be deferred until at least September,” he said.

Warren Buffett, the chairman of Berkshire Hathaway, said the Fed is caught in a bind.

Quantitative easing in Europe has created a huge gap in yield differentials, driving funds across the Atlantic into the US debt markets and driving up the dollar. Any Fed tightening would risk making matters worse.

“I think it would be very hard for the Fed to bump rates up here with negative rates in Europe,” Mr Buffett told CNBC.

The weak jobs data will revive a row over how strong the US labour market really is. The unemployment rate has almost halved to 5.5pc and job vacancies are - on paper - more abundant than they were at the peak of the pre-Lehman boom. The number of people claiming jobless benefits fell to a 11-year low of 262,000 last week.

Yet wages have failed to pick up as expected. Average pay growth for non-supervisory workers has languished at 1.6pc over the past year and has actually slowed to a rate of 0.8pc in the past three months.

“There is more slack than meets the eye,” said the International Monetary Fund.

Huge numbers of people dropped out of the workforce after the financial crisis and have yet to be drawn back into the system.

The labour participation rate is still at a 37-year low of 62.7pc. The rate for males has dropped from 73.8pc to 69.3pc since 2007, a drastic fall that cannot be fully explained by changing technology or “structural” problems.

A new paper by Danny Blanchflower and Andrew Levin for the National Bureau of Economic Research argues that there are still large numbers of people with part-time jobs who want to work full-time. Once all forms of “hidden unemployment” are included, the shortfall reaches 3.3m jobs. The real unemployment rate is around 7.5pc.

This means the US is still a long way from the inflexion point when a tight labour market sets off a wage spiral. “Monetary policy tightening would be premature at the present time. Indeed, such a policy move would be a serious mistake,” the paper stated.

Mr Blanchflower said the Fed will not be able to raise rates this year, whatever the hawks may suggest. The paper may reflect the broad thinking of Ms Yellen, who tracks an array of under-employment indicators and is likely to move with great caution under her “balanced approach rule”.

The futures markets have now pushed out the first rate rise to September. Citigroup doubts that there will be any action until December.

The crucial confirmation either way will come next week with the release of non-farm payroll data. If the jobs market fails to recover yet again it will be impossible to keep blaming the relapse on a polar winter.

The cherry blossoms have already been and gone in Washington. We are in May.

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