Employment will remain flat
Interview: Putnam Investments---Goodman, Robert---Economist
>> the bank of england lowered its inflation forecast for the first time in two years. it will fall below the government’s target of 2.5% after peaking at 3% in april. the forecast change suggests policymakers of europe’s second largest economy will keep interest rates at a 48-year low to support the economy’s recovery. the central bank’s new forecast is slightly lower than its last projection in may. our next guest says the economy will be much stronger in the second half of the year mainly because of the strength of the consumer. but he says employment will remain flat for a whimpt robert goodman, senior economic advisor of put numb investments joins us today in our studio. welcome.
>> thank you.
>> let’s start off with that right there, because there are people to take a look at the employment situation and say how can the consumer continue to spend if they know somebody or are somebody that is having a problem with their job or finding another one?
>> the reality of it is 94% of our population is working. and because it’s so productive they are earning enough to buy back what they are producing. and from an economist’s point of view it might sound strange, but our economy can continue like this for quite a while without reemploypg individuals. it’s only after a while where you need more people to produce more and more goods and services that you begin to see the employment numbers firming up. and that could take quite a while.
>> how―what would it take for jobless claims to actually go in the opposite direction to increase once again? at what point would you then be alarmed about the future of the employment picture? how high would it have to go if it were to buck the trend at this point?
>> well, you know, there is sort of an arbitrary dividing line, 400,000 new claims a week. as you know, we are heading down towards that number. on a moving average we should be below it i think on a sustainable basis in august, september. i would worry if that trend were broken and began to creep back above 400,000. but it’s very very unlikely that “if” is very improbable. we’ve got the stimulus of a very strong tax cut now. the very easy monetary policy and a declining dollar which boosts growth.
>> we have a chart, a weekly chart of the jobless claims. clearly it’s headed lower in the past month, and you would expect to see that move lower. when do you expect to see it back to the low of the year which looks to be back in april?
>> these things are pretty volatile. you can get that in september or october. you could be right back down where you were there and continue down.
>> and i should say that’s in january, the beginning of the low there, january was the low. but do you expect, is that going to be important? is that an important level for you to look at?
>> i think investors will take it as a signal the labor market stabilized. again, before you see improvement in the unemployment number, the rate, that could take months and months. and that’s not an economic problem. it becomes a political problem.
>> do you have a number, an expectation for tomorrow?
>> no, i wouldn’t even dare try and forecast it, except that it could very well be below 400.
>> retail sales. buoyant consumer out there. talk to us more about how important that is.
>> across the board, taking out autos, for example, still, very strong. so the consumer is back without the benefit of this tax cut. now you’ll see the benefit of the tax cut coming through with, you know, school sales and all the rest of it.
>> won’t that be offset by higher interest rates ultimately?
>> no. we’ve got a long way to go before interest rates bite into this economy. two years ago would anybody guess the 10-year treasury would have been as low as 4.56? now we are worried it’s up to 4.56. before it would begin to bite it would have to go higher. i suspect a year from now it will be 5.25. it won’t matter for equity investors because of profitability and growth and the economic scene will look better.
>> could it affect corporate spending, could that ultimately stop them from borrowing in order to --
>> the keyword is ultimately and at what level. before that happens i think you’ll see business spending kick in. it will be spurred by corporate profitability, corporate borrowing will pick up. again, if the prospects for profits are better, they’ll borrow at higher and higher rates. it just makes sense.
>> economists trying to guess what the fed is going to do next when they are actually going to raise rates since they made it pretty clear they are not going to ler them any time soon. they are not going to raise them any time soon either. what will allow the fed to raise rates.
>> the fed will wait until it’s convinced beyond a shadow of a doubt this economic economy is sustain ablg. keep in mind they have a window next year. next year, just six, seven months because you get into the political season, they can’t do much, as you get through july, august, september, october. looks like they’ll stay pat for quite a while. the bond market, by the way, did not fall for what the fed was trying to do yesterday by talking about deflation again. they tried to get the bond market to buy that. to keep rates from rising. but the bond market is telling us the prospects are for more growth. that’s very bad news for bondholders. it’s when rates go up prices of bonds go down. for equity holders it’s the best forecast you can get because it means more growth, more profitability and i might say more profitability than people expect right now.
>> but the activity there has led to swlat of a squelching on the equity market, has it not, the way the bond market has moved, has led some investors to pause a bit to try to figure out where they want their allocation.
>> i think they are trying to figure out where they want to go not necessarily because bond yields have gone up. traders are acting like most people are on holiday. come back september. when all that cash coming out of the cash funds, it will be interesting.
>> robert goodman. we’ll see you in september. senior economic advisor at putnam investors. asian stocks rose led by exporters after economic numbers in the u.s. showed signs of accelerating growth.
