The latest employment data is significant and insightful, believes Mohamed El-Erian, chief executive officer and co-chief investment officer at the $1.8 trillion Pacific Investment Management Co. The report reveals three important developments. First, 171,000 new jobs were created because of two important events; the housing sector stabilizing and better consumer confidence.
The second important but less encouraging development; businesses remain hesitant which reflects in the hourly earnings data. The structural underpinnings have not improved though participation rate in the jobs market has gone up. Long-term unemployment has edged back over five million and youth unemployment remains stuck at 23.7 percent. Bottom line, good report but job growth not yet achieved escape velocity to put the unemployment crisis behind us, he noted.
Overall the economy has been improving and indicates a growth rate of about two percent. But within the economy, segmentation has taken place. The households are feeling better because of the improvement in the housing sector and higher consumer confidence while the business sector feels uncertain because of the political situation in Washington, Mohamed observed.
The government needs to do two things in the next few months; first remove the headwinds – settle the issue of fiscal cliff and second, produce tailwinds. The government needs to do away with some of the legacies of the financial crisis that is still undermining the recovery. The private sector is trying to move forward, but is hesitant because of these headwinds.
Markets need to deal with three uncertainties if Governor Romney wins the presidential elections, Mohamed noted. The first is labeling China a currency manipulator on the first day. Next, finding some one to replace Fed chairman Ben Bernanke and finally, walking away from quantitative easing.
Asked if it would be wrong to discontinue QE, Mohamed said the Fed can’t walk away QE at this stage. It may try to slow down the pace of assets purchase to undo collateral damage, but if it tries to slow down too quick, there is a possibility the economy slips back into recession, he added.
There is a good possibility some consensus is reached before the so-called the ‘fiscal cliff’ is hit, he said, adding a mini bargain, hopefully, would be reached after the elections in the lame-duck session that will follow, because failing to do so will have dire consequences. Nobody wants the economy to slip back into recession when unemployment is still an issue, he concluded. You can watch the video here.