I’m sure you’re aware now that the FOMC decided not to raise rates, with Hoenig as the usual dissenter. Hoenig’s dissension basically revolves around changing the language of “likely to warrant exceptionally low levels of the federal funds rate for an extended period” to something a bit more definite (i.e. giving a timeline).
The report goes on to say that the labor market has shown signs of improvement, yet business remain reluctant to hire and make capital purchases. My take on the statement will be that if they are seeing signs of a labor market recovery, that growth is probably in the temporary employment sector. I am going to give them the benefit of the doubt and hope that they predicated their decision on assigning a lower weighting to the temporary Census jobs that are being created and a substantially higher weighting to temp jobs outside of the Government sector. Time will tell and that will happen on the NFP Friday coming up next week.
Anecdotally, I’ve seen patches of hiring in manufacturing. On a brief walk through an industrial area after dark, I’ve noticed a few places beginning to run operations into 2nd and 3rd shifts. I’ve also spoken to friends in the manufacturing sector who say that orders are slowly coming back in, albeit at a tempered pace. This would make sense given that many businesses who have had to delay equipment upgrades and trim back inventories have gotten to the point where they simply must begin to order.
From the statement, this struck me as particularly interesting and bodes well for INTC, DELL, MSFT as many analysts are predicating stronger results on a forecasted upgrade cycle: “Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls.” I believe that part of this has to do with the upgrade cycle, which goes back to my explanation in the 3rd paragraph. Many businesses didn’t upgrade computers or delayed purchasing software during the worst of the Depression (let’s be real, it was/is a Depression) because, quite simply, they had a ton of well-working computers laying around from all the people they fired, or machinery sitting idle. I think many businesses were able to unload the excess computers/machinery on the resale market to generate cash, and now that they are beginning to repair their balance sheets, despite a lack of credit they are forging ahead and upgrading that equipment, but holding back on the larger big ticket items that require credit to purchase.
Household spending, even though it has picked up, cannot continue at the levels I think the Fed is looking for in order to proceed with a rate hike cycle. The primary reason: Unemployment. EUC claims continue to skyrocket as more and more people exhaust benefits, although the rate of change has begun to slow (this can also be explained by people who joined the EUC program at the beginning, and have now exhausted all tiers). Without substantial growth in temporary employment (where the jobs actually last more than 3 to 6 months) or full time employment, I think that household spending runs a real risk of double dipping. Households have run out of avenues to turn (tighter credit, the Home Piggybank is shattered, an already abysmally low savings rate for most of their lives is now depleted, etc). If household spending double dips, that will ripple through the economy, which puts us at real risk at endangering the “recovery”
On a final note, anecdotal reports from people I know personally looking for jobs tell me that wages are going to be substantially lower, while the competitiveness for any available jobs (temp/perm) is frustratingly high. Many of the recruiting/HR practices that created many discouraged workers (I use the term in context to mean frustrated, not giving up due to lack of available openings) are still rampant, and now with reports that many companies are resorting to credit checks for potential new hires, that could cause the unemployment rate to remain quite static in the mid 9’s for quite some time unless there’s something done about that practice. I don’t want to get into the full argument here, as Daniel Indiviglio wrote about this in August 2009 for The Atlantic. You can read the article here: Will The Recession Make Inequality Worse?. I, like many, look forward to the BLS numbers to see where the recovery in employment is, given the fact that businesses are still reluctant to hire, among other factors.
You can read the full text of today’s FOMC statement here: http://www.federalreserve.gov/newsevents/press/monetary/20100428a.htm