Far more weight is put on official US unemployment data than they can bear. The monthly non-farm payroll report is regularly subject to huge revisions. The latest edition was a classic of the genre, with its admission that 41,000 fewer people had found jobs in June and July than previously thought.
Despite this, the payroll report matters. It moves markets. Friday’s report, showing an unemployment rate of 8.1 per cent while an extra 96,000 people found jobs, fewer than expected, could prove to be one of the most important reports ever released. Because of the timing of the political cycle, huge swings in both monetary and fiscal policy could depend on it, as well as the outcome of November’s presidential election.
On monetary policy, the Federal Reserve – unlike other central banks – is mandated to maintain full employment, not just fight inflation. Its rate-setting Federal Open Market Committee meets next week, and Ben Bernanke, its chairman, has left the door open for “QE3”– a third round of buying Treasury bonds to push down their yields and lower long-term interest rates.
As these numbers were worse than expected, and the FOMC has already said that bond purchases will be needed barring evidence of “a substantial and sustainable strengthening in the pace of the economic recovery”, the chances of QE3 next week are much increased. That can be seen in the price of gold, which leapt on the news and is at its highest since February. As gold is perceived as a “hard” currency, investors tend to buy it as a hedge against potentially inflationary policies such as QE3.
As for fiscal policy, it is a point of division between the presidential candidates. Mitt Romney, the Republican candidate, has adopted a rhetoric of aggressive deficit hawkery, even if he couples this with promises of tax cuts, which tend to widen the deficit. The next president will immediately have to negotiate with Congress over how to avoid falling over the “fiscal cliff” – a package of spending cuts and tax rises due to go into effect early next year, which would cut the deficit but hamper growth.
At first sight, the payroll data look horrible for the incumbent, Barack Obama. At 8.1 per cent, the official unemployment rate is higher at the Labor Day start of the campaign than in any other presidential election year since the war. This rate would be much higher were it not for people giving up on job searches and dropping out of the potential workforce.
But the situation is not quite as bad for Mr Obama as it first appears. The rate of progress at the time of the election is more important than the level. Unemployment was 7.4 per cent in the August before Ronald Reagan won his landslide re-election in 1984, but this represented a 30 per cent improvement from the nadir. Eight years later, the elder George Bush lost with an unemployment rate just under 8 per cent that had only just bottomed and had not started a significant improvement. The election came at the wrong point in the cycle for him.
Mr Obama has presided over an 18.7 per cent improvement in the official jobless rate since the nadir. That probably gives him a better chance than Mr Bush had in 1992, but it will still be hard to sell this to American voters.
What effect will this have on markets? The complaint that Mr Obama is anti-market finds no support in market data. Profit margins have hit record highs over the past four years – capital is beating labour as never before. Unemployment is principally due to government job losses, while private sector employment has improved. Meanwhile, the S&P 500 has gained 78 per cent since the president was inaugurated, and is now at its highest since early January 2008.
Judging by prediction markets, in which people wager money on futures tied to the outcome of the election, the prospect of an Obama re-election has caused little or no concern for investors. Polls show the race tightening, but markets show him as the clear frontrunner. The Iowa Electronic Market, the longest established prediction market, put his odds at 66 per cent, while the Intrade prediction site, has him at 58.7 per cent.
Moreover, improvements in Mr Obama’s chances correlate neatly with stock market rises. His low point for the year came on June 19, according to Intrade. Since then his chances have risen steadily, just like the S&P 500. Stocks have even been impervious to an improvement in the Democrats’ chance of holding on to the Senate.
Surging stock markets have helped Mr Obama; the prospect of his re-election has not damaged stocks. But the most likely projection now, with an economy that is recovering far more slowly than it was reasonable to hope, is that the odds will tighten.
The European Central Bank may this week have done enough to keep political uncertainty in the eurozone under wraps for a few months. That is just as well, because following these jobless numbers, politics in the US are about to create a lot of uncertainty for everyone.