Wonkbook: Previewing the June jobs report: 100,000 jobs? 125,000?

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	Friday, July 6, 2012

Ezra Klein's Wonkbook

The big news today will be the jobs report, which comes out at 8:30am. Economists surveyed by Bloomberg News expect to learn that the economy added 100,000 jobs in June — well above the 69,000 it added in May, but well below the 259,000 it added in February.

Goldman Sachs, which is expecting to see that we added 125,000 jobs in June, points out that this will be the first jobs report in awhile that “should be relatively free of the distortions that have plagued analysis of the underlying employment trend recently. In particular, the ‘payback’ for the unusually mild winter is now almost certainly behind us.” That is to say, the June jobs report might be a clearer look at the underlying trends in the economy than either the quick, weather-aided growth we saw early in the year or the sharp deceleration we saw in May. Hopefully, it won’t be too depressing.

Meanwhile, yesterday was an unusually exciting day in global central banking, with significant moves coming from the European Central Bank, the People’s Bank of China, the Bank of England, and the central banks of Denmark and Kenya. Read on for more on that.

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Top story: The return of the central banks

The ECB cut interest rates to a historic low. “The European Central Bank has cut its main interest rate to a historic low amid signs that prospects for the eurozone economy are looking increasingly bleak. Mario Draghi, ECB president, said policy makers had ‘unanimously’ decided to cut the central bank's main policy rate by a quarter of a percentage point to 0.75 per cent, pushing the rate under 1 per cent for the first time…The ECB also cut the interest rate on its deposit facility to zero, marking a bold step in its attempts to reduce general market interest rates and stimulate interbank lending. The deposit rate is what the ECB pays banks for their overnight deposits with it. It in effect sets a floor for market rates, since banks have no incentive to lend to each other for less reward than they get for parking money safely at the central bank.” James Wilson in The Financial Times.

READ: Mario Draghi’s statement on the rate cut.

Economists were underwelmed by the ECB’s actions: http://on.wsj.com/PnHbEx.

@charlesforelle: ECB summary: Plenty of monetary-policy easing, no hint of philosophical easing. The ball is still in Germany’s court

China cut interest rates for the second time in less than a month. “China's central bank unexpectedly cut regulated bank lending rates by nearly a third of a percentage point on Thursday evening, and made a rule change that could further reduce borrowing rates for companies with good credit by an additional three-fifths of a percentage point…The People's Bank of China reduced the regulated rate for one-year bank loans by 0.31 percentage points, to 6 percent. At the same time, the central bank also said that banks would be allowed to charge as little as 70 percent of the regulated interest rate to good customers; the previous minimum, set a month ago, had been 80 percent. And until the initial rule change early last month, banks had been required to charge at least 90 percent of the regulated rate, even to their best customers.” Keith Bradsher in The New York Times.

The Bank of England extended its QE program. “The Bank of England has turned the printing presses back on after a majority of the members of its interest-rate setting committee voted to pump another ?50bn into the stalled economy. Interest rates were held steady at 0.5 per cent…The monetary policy committee has torn up its growth and inflation forecasts of just a few months ago in reaction to signs that the UK economy was weaker than it thought. This, along with falling commodity prices, has pulled inflation from a peak of 5.2 per cent last September to 2.8 per cent in May.” Sarah O'Connor in The Financial Times.

Denmark’s central bank dropped its deposit rate below zero. “Denmark’s central bank mirrored the European Central Bank’s historic rate cut by taking a rare step of its own: slashing its deposit rate below zero for the first time…Nationalbanken left the key policy lending rate in positive territory, although it was cut by a quarter of a percentage point, to 0.2%, from 0.45%. So, it is still charging interest on its loans, but not much. Investors seeking havens have been willing to accept negative interest rates on newly-issued government debt during the euro zone crisis.” Flemming Emil Hansen in The Wall Street Journal.

Even Kenya’s central bank cut its interest rates. “Kenya’s central bank declared a measure of victory over high inflation and currency volatility after a months-long battle, cutting its benchmark lending rate by a bigger-than-expected one and a half percentage points. While a sharper-than-forecast fall in inflation last month offered scope for a rate cut, particularly after disappointing first quarter growth figures, the bank was left balancing the need to spur output and protect a still vulnerable currency. The regulator came under fire last year for sacrificing the currency and prices at the altar of economic growth, when soaring inflation and currency turmoil engulfed the region. It atoned in the final quarter of 2012 when it jacked up rates. The Monetary Policy Committee on Thursday cut the central bank rate by 150 basis points to 16.5 percent, saying its tightening stance had worked to cool inflation and stabilise the shilling.” Duncan Miriri in Reuters.

But the Fed isn’t expected to mirror the ECB’s deposit rate cut. “The European Central Bank's decision to cut its overnight deposit rate to zero to spur lending isn't likely to prompt a similar move by the U.S. Federal Reserve, economists said Thursday in the wake of a flurry of global central bank activity. Fed officials have said U.S. banks are holding around $1.6 trillion in excess of what they need to back their deposits at the U.S. central bank, but few economists expect the Fed to lower the interest it pays on those funds-already very low at 0.25%-in a bid to nudge banks to use it elsewhere.” Kristina Peterson in The Wall Street Journal.

@TheStalwart: Time for a surprise inter-meeting cut by the Fed

@TPCarney: Were I a central banker set in inflating the money supply, I’d do it by hiding Benjamins all around the country.

The euro didn’t fare so well in the aftermath. ”The clear loser in the currency markets after three of the world's big central banks either cut interest rates or embarked on more emergency bond-buying was the euro. The single currency tumbled against every other big currency…It fell to below $1.24 versus the dollar, hitting its lowest level in a month and more than giving up the gains it had made since last week's summit of EU leaders. Analysts say the effect of the ECB's decision is to eliminate the interest rate advantage the euro has had over other big currencies, including the dollar and the yen.” Alice Ross in The Financial Times.

The ECB is running out of conventional monetary tools. “Mario Draghi is almost out of wriggle room. By cutting its main policy interest rate a quarter of a percentage point on Thursday and bringing the rate it pays on overnight deposits to zero, the European Central Bank moved close to the end of the road in terms of what normal monetary policy can do to revive the stalling EU economy. Mr Draghi said the ECB's governing council was unanimous in deciding on the measures, which leave a further quarter-point reduction as perhaps the last interest rate cut open to the bank before moving into more unconventional territory, such as more support for or sovereign bond purchases…Asked whether the ECB was running low on policy options, Mr Draghi, said ‘there was no such feeling … we still have all our artillery ready.’ He said the council had not discussed any other ‘non-standard’ measures such as buying sovereign bonds or making more long-term cheap funding available to banks.” James Wilson in The Financial Times.

Spanish and Italian bond yields continued to rise. “A sell-off in Spanish government bonds intensified Thursday despite the European Central Bank’s decision to slash interest rates to record lows, as the country was forced to pay higher yields at a debt auction, in a sign that optimism following last week’s European Union summit is fading. Spain’s debt has now erased the majority of the gains of the past week, as doubts over the details of reforms agreed at the summit continue to mount. Italian yields also rose, further taking the gloss off the rally in peripheral debt that began when the summit delivered more than markets had hoped for. The ECB cut its benchmark interest rates by 25 basis points each…But any hopes that the move would calm tensions in Spanish and Italian bond markets were swiftly dashed, with traders saying some investors had been hoping for additional steps from the ECB, such as a further three-year liquidity operation.” Tommy Stubbington and Emese Bartha in The Wall Street Journal.

@ObsoleteDogma: I’m old enough to remember when the last Euro summit was a big positive step forward.

FINANCIAL TIMES: The central banks fell short. “Tight fiscal and loose monetary policy is, in the words of UK chancellor George Osborne, a textbook response to the financial crisis. But across Europe, a slowdown is weakening fiscal stances while a credit crunch is eroding the stimulus offered by central banks. Had the Bank of England and the European Central Bank not relaxed monetary policy on Thursday – Frankfurt by cutting rates a quarter-point; Threadneedle Street by buying another ?50bn of gilts – they would have been complicit in the growing cost of credit faced by households and businesses. Even what they did do is so modest that they are running just to stand still…Both central banks fell short of the real credit boost their economies need…To do its job, the ECB must restart buying bonds in the market – this is justified even on its own contorted rationale for these programmes…Instead, it acted solely on the interest rate – the action with the least impact.” The Financial Times Editorial Board.

BARLEY: Monetary policy may not be able to do much at this point. “Welcome to rate-cut city. The People’s Bank of China, the European Central Bank and the National Bank of Denmark all cut rates Thursday, and the Bank of England delivered another ?50 billion ($77.95 billion) of so-called quantitative easing through bond buying…In many developed economies, the monetary-transmission mechanism, whereby reductions in official rates filter through to juice demand, is broken. Very low rates may even be an impediment to growth, as they signal how poor the outlook is and squeeze those on fixed incomes. Despite rates that have been negative in real terms for years now, the BOE noted that U.K. output had barely grown for 18 months, while the ECB acknowledged that the whole euro-area economy was being damaged. Thursday’s rate cuts and bond purchases are an understandable response and may not be the last. But–perhaps with the exception of China–they look increasingly subject to diminishing returns.” Richard Barley in The Wall Street Journal.

@BCAppelbaum: Wonder if more kids now dream about a high-profile, consequential life as a central banker.

Top op-eds

1) YGLESIAS: Granting more patents will stifle innovation. “The U.S. Patent and Trademark Office this week announced the opening of its first set of field offices, coming soon to Silicon Valley, Detroit, Denver, and Dallas. This move was mandated by the America Invents Act of 2011, the most important recent effort to overhaul the country's badly broken patent system. Unfortunately, both the new offices and the larger legislative framework reflect a fundamental misunderstanding of what's gone wrong with patents. The underlying assumption is that our major patent problem is that applications are processed too slowly. In fact, the problem is that we're granting far too many patents, tying up vast swathes of industry in litigation and negotiation rather than innovation…In almost no sector of the economy do politicians talk about their desire to promote more monopolies and less competition, but that's exactly what the recent round of patent reform is all about.” Matthew Yglesias in Slate.

2) KRUGMAN: What’s good for Bain Capital isn’t good for America. “His case for becoming president relies, instead, on his claim that, having been a successful businessman, he knows how to create jobs. This, in turn, means that however much the Romney campaign may wish otherwise, the nature of that business career is fair game. How did Mr. Romney make all that money? Was it in ways suggesting that what was good for Bain Capital, the private equity firm that made him rich, would also be good for America? And the answer is no…Bain didn't build businesses; it bought and sold them. Sometimes its takeovers led to new hiring; often they led to layoffs, wage cuts and lost benefits. On some occasions, Bain made a profit even as its takeover target was driven out of business. None of this sounds like the kind of record that should reassure American workers looking for an economic savior.” Paul Krugman in The New York Times.

3) MALONE: New innovations will set off a burst of growth if we let them. “Three years after the recession was declared officially over, unemployment remains high and there’s worry that a new recession is down the road. And yet waiting in the wings for when we get our economic policies in order are a mounting number of stunning discoveries, inventions and technological breakthroughs that could set off a burst of growth and wealth creation as big as any in living memory.” Michael Malone in The Wall Street Journal.

4) FREEMAN: We need federal regulation of fracking. “America’s energy future has been transformed by the production of natural gas made possible by hydraulic fracturing. This gas is a much cleaner source of electricity than coal. The problem is that the fracturing process used to extract the gas can, if done improperly, pollute surface and drinking water and emit dangerous air pollution. States like Texas, Pennsylvania and New York are now rushing to impose their own rules…The uneven approach is bad not only for the environment but also for industry, because under the current system, mistakes by a few bad apples could lead to overregulation or even outright bans on drilling. A better approach is one already reflected in many environmental laws: cooperative federalism. The federal government sets baseline standards, which states can exceed but not fall below.” Jody Freeman in The New York Times.

5) LIND: American history holds lessons for the eurozone. “The irrelevance of American federalism to the EU's crisis does not mean that Europeans cannot learn anything from the American experience. The US is not only a federal nation state but also the military and economic hegemon of North America…The American example shows that these hegemonic functions can be carried out effectively in the absence of formal, supranational, regional institutions…The parallel is not exact. By itself, Germany, the largest country in the EU, does not have anything like the weight of the US in North America. But the American example suggests that, by concerted action, the two or three largest European economies might function as a responsible regional hegemon, acting as both lender and consumer of last resort…If regional economic hegemons exercise responsible leadership, formal regional institutions are unnecessary. And if regional hegemons refuse to play constructive roles, formal regional institutions will be useless.” Michael Lind in The Financial Times.

Piano rock interlude: Tori Amos plays “Crucify” live on The Sharon Osbourne Show.

Got tips, additions, or comments? E-mail me.

Still to come:The most exciting day of the month; Medicaid expansion could save states money; NCLB is fading away; auto lending is surging; and some pandas have a delightful time going down a slide.

Economy

It’s jobs day! “The Labor Department releases its report on June job growth on Friday, and economists are crossing their fingers for some good news. ‘Good news’ is a relative term, of course. In May, the nation's employers added a measly 69,000 jobs, whereas a gain of 125,000 to 150,000 jobs is needed just to keep up with the growth in the working-age population before even touching the backlog of nearly 13 million unemployed Americans. The median forecast for June is that job growth ticked up slightly to 90,000 jobs, and that the unemployment rate stayed flat at 8.2 percent.” Catherine Rampell in The New York Times.

ADP’s jobs numbers beat expectations. “Firms added 176,000 jobs last month, according to payroll processing giant Automatic Data Processing Inc., in a report compiled with forecasting firm Macroeconomic Advisers LLC. Economists surveyed in advance of the report’s release had expected to see it show a 108,000 gain for June…The ADP report is different than the government’s release because it counts only private-sector jobs.” Michael Derby in The Wall Street Journal.

@JustinWolfers: When economists cite the ADP jobs estimate as our economic ray of hope, they reveal how weak recent data have been.

@mattyglesias: ADP is a fairly weak predictor of official jobs report, but concordance with falling initial claims is telling.

The CFPB is planning an overhaul of the home mortgage market. “Over the next six months, the Consumer Financial Protection Bureau…intends to overhaul the home mortgage market as a first step toward improving its fairness and clarity. The goal is to remake the process of getting a mortgage, making it easier for borrowers to understand the kind of loan they are getting and its cost…This summer, the consumer bureau plans to propose rules that will address the biggest stumbling blocks buyers face. When shopping for a loan, consumers will get a more complete and understandable ‘good faith estimate’ of the costs. Before closing a sale, consumers will receive a single, revamped disclosure form of the terms — the interest rate that they will pay, how it could change over the course of the loan and how much cash is needed at closing. And mortgage servicers, the companies that collect the payments, will be required to provide clearer information, better service and options for a borrower facing foreclosure.” Edward Wyatt in The New York Times.

Greece has dropped its push to ease the terms of its bailout. “Greece's new government has dropped a plan to seek softer terms for its second bailout following warnings that it would be rejected by international lenders. Yannis Stournaras, finance minister, said the governing coalition would have to accelerate reforms before asking for modifications in a EUR174bn programme agreed in February with the European Union and the International Monetary Fund…Greece's change of tack came as EU and IMF officials visiting Athens this week echoed a statement by Christine Lagarde, the IMF managing director, in a television interview that she was ‘not in negotiations or re-negotiations mood’ on the Greek bailout. The three coalition partners – the conservatives and two left-of-centre parties – all pledged during recent election campaigns that Greece would seek a one- or two-year extension of the programme to ease the impact of almost five years of recession, with unemployment now above 21 per cent.” Kerin Hope in The Financial Times.

Home equity loans could hit banks with more losses. “U.S. banks may be hit with a new round of mortgage losses over the next five years as borrowers who took out home-equity loans a decade earlier face increased monthly payments, a regulator warned Thursday. The Office of the Comptroller of the Currency warned that more than half the amount borrowed on equity lines at national banks, or $221 billion out of $380 billion, will face higher payments from 2014 to 2017, exposing banks to the possibility of losses if some equity-line borrowers default. Home-equity lines extended during the mid-2000s housing-market boom years typically had a 10-year period in which the borrower made only interest payments. When that period ends, borrowers must start to pay back the principal balance as well, increasing monthly payments for some homeowners who have seen their incomes and property values decline.” Alan Zibel in The Wall Street Journal.

Overseas investment in the U.S. is on track to rise in 2012. “Companies around the world are on track to increase their investments in the U.S. during 2012, according to a report Thursday by the United Nations. But overseas investment in the U.S. and elsewhere–which has been climbing since the global financial crisis in 2008–could slow significantly this year if global economic turmoil intensifies, the United Nations Conference on Trade and Development said in its report. Outside investment in North America–predominantly the U.S.–is expected to total about $270 billion this year, a roughly 1% rise from $268 billion last year…Last year, foreign investment in the U.S. alone was $227 billion, a 15% jump from $198 billion in 2010, as America’s oil, gas and manufacturing sectors lured investors.” Neil Shah in The Wall Street Journal.

Strange conversations interlude: Jeremiah McDonald talks to his 12 year-old self, 20 years later.

Health Care

The Medicaid expansion could actually save states money. “Republican governors opposing the Medicaid expansion have focused on the costs their states would have to take on. But there are also ways that the expansion would save state governments money, helping to offset at least some of the new upfront Medicaid costs. And in some cases, they're likely to save states more money on Medicaid than they currently are spending…Overall, the savings will likely bring down the upfront costs to states of the Medicaid expansion. The Center on Budget and Policy Priorities calculates that state Medicaid spending will ultimately rise by 2.8 percent by 2022 if they join the expansion. However, that figure ‘actually overstates the net impact on state budgets because it does not reflect the savings that state and local governments will realize in health-care costs for the uninsured,’ says CBPP spokesperson Shannon Spillane. ‘In fact, states could end up with a net gain.’” Suzy Khimm in The Washington Post.

@afrakt: Surprisingly, nobody has made the obvious point that “tax” is a 10-point Scrabble word, while the far longer “penalty” nets 12-points.

Domestic Policy

The Obama administration has chipped away at NCLB. “In just five months, the Obama administration has freed schools in more than half the nation from central provisions of the No Child Left Behind education law, raising the question of whether the decade-old federal program has been essentially nullified. On Friday, the Department of Education plans to announce that it has granted waivers releasing two more states, Washington and Wisconsin, from some of the most onerous conditions of the signature Bush-era legislation. With this latest round, 26 states are now relieved from meeting the lofty — and controversial — goal of making all students proficient in reading and mathematics by 2014. Additional waivers are pending in 10 states and the District of Columbia…In exchange for the education waivers, schools and districts must promise to set new targets aimed at preparing students for colleges and careers. They must also tether evaluations of teachers and schools in part to student achievement on standardized tests.” Motoko Rich in The New York Times.

The House farm bill makes deeper cuts to food stamps. “The House Agriculture Committee leadership rolled out its vision of a new five-year farm bill Thursday, a 557-page draft that builds on the Senate passed-plan but makes deeper cuts from food stamps while restoring target prices sought by Southern growers. The action begins a long uphill climb for Chairman Frank Lucas (R-Okla.), who must contend with tepid support from the top GOP brass and a fractious class of Republican freshmen who have never been through a farm bill debate before…Congressional Budget Office estimates, released Thursday evening, credit his bill with saving $35.1 billion over 10 years or roughly $11 billion more than what that emerged from the Senate in June. Virtually all of that difference is explained by the much larger savings from food stamps — a $16 billion-plus package that triples what the Senate approved and imposes tougher income and asset tests that will disqualify hundreds of thousands of working-class households now getting aid.” David Rogers in Politico.

Adorable animals using playground equipment interlude: Four pandas play on a slide.

Energy

Auto lending is surging. “Around the country, banks and other lenders are still being stingy in providing credit to ordinary consumers. Only the most financially stable of Americans can secure mortgages. Small businesses are having trouble getting loans. Credit card access is restricted. But there's one notable exception, an area where lending has been surging: Autos. Millions of Americans have found that it's becoming surprisingly easy to borrow money to buy a car. New bank loans for autos totaled $47.5 billion in the first quarter of 2012, higher than at any point in the past seven years, according to Equifax. Interest rates are getting cheaper by the month. And even Americans with relatively poor finances can get auto loans: The average person financing a new car purchase had a credit score of 760, down six points from the previous quarter, according to data from Experian. For a used car, the average credit score was down to 659.” Brad Plumer in The Washington Post.

The U.S. filed a complaint against China’s auto tariffs. “The United States has filed a complaint against China with the World Trade Organization over tariffs on American-made automobile exports, the Obama administration announced Thursday…The latest dispute centers on tariffs of from 2 percent to more than 12 percent that China imposed on 92,000 larger U.S. cars and sport-utility vehicles exported from the United States in December. China argued that automakers like General Motors were benefitting from government subsidies and selling their products at unfair prices in China…In March, the White House filed a WTO complaint asking China to loosen its restrictions on exports of rare-earth minerals.” David Nakamura and Howard Schneider in The Washington Post.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

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