The bad news came in two pieces last week. The June payroll growth grabbed larger attention but the dive in the ISM manufacturing new orders index to the weakest level since the recession also carries large future economic risk.
Nonfarm payroll growth rose just 80K in June to leave a second quarter average of 75K -- the weakest quarter since the declines of a year and a half ago. Over the longer term payroll growth is needed to boost total income and therefore spending and economic growth. In additon, an 8%+ unemployment rate is seen as a key indicator for the November elections. Why is the Administration sitting on its hands while the Fed is running dry of credible policy solutions?
Growth uncertainly was further increased by the ISM manufacturing index. A drop in the levels of orders and specifically export orders to contractionary levels left the overall manufacturing index also at a level consistent with decline (below 50) for the first time in threee years. Half of the 18 industries reported contraction as headwinds from Europe and China left the large new orders declines.
The combination of weak payroll growth, resulting weak spending growth and now a decline in the manufacturing sector is a very significant risk as the Fed continues to look ahead. The Fed's policy actions to combat the weak economy have been unprecedented. From the near 0% policy rate to the bond buying to bring 10 year rates down to the current 1.6% (and a negative inflation-adjusted rate) to the alphabet soup of TARP, TSLF and PDCF (read Everything but the Kitchen Sink for a review of that astounding effort). Now the public and markets want more and the Fed may provide it in the months ahead. But the Fed efforts only keep interest rates low as banks remain hesitant to lend.
The Fed assumes economic growth will strengthen to a 1.9% to 2.4% range in 2012 as another likely sub-2% growth rate in the second quarter adds to the 1.9% GDP growth in the first quarter. The reason for holding off added stimulus is to save some ammo in case Europe falls in to a steeper decline and provides another downward pull on U.S. growth. The Fed is really pushing on a string and if the markets wake up to it the policy effect will lose most of its punch.