Mohamed El-Erian
LAST week’s employment report confirms that the US labour market is healing. Taken against the backdrop of a weakening global economy, it highlights the extent to which the US’s economic and policy situation is diverging from that of Europe and Japan. It also speaks to what would need to happen next to ensure that a broader recovery in the labour market is part of the long-desired lift-off for the US economy.
The strength of the latest monthly employment report can be seen in the job-creation figure of 214 000 for October. Combined with revisions of 31 000 for the prior month, the six-month average is 235 000 (and 220 000 for 12 months). The unemployment rate also declined, to 5.8 percent, the lowest since July 2008. The unemployment rate has fallen 0.8 percentage point this year, with the more comprehensive measure of unemployment and underemployment falling even more, to 11.5 percent.
Unfortunately, these improvements have not been replicated in other indicators of labour-market health. On the wage front, the growth in average hourly earnings is disappointing. In addition to its adverse impact on demand, this does nothing to counter the widening in income inequality. More robust income increases are needed to complement stronger gains in some of the more structural components of the labour markets, particularly the participation rate and long-term joblessness.
Taken against the backdrop of slow global economic growth, the employment report highlights what is already a rather noteworthy divergence in both economic performance and policy prospects between the US, Europe and Japan. Not only is the US outperforming, but the gap is likely to widen in the months ahead. This will also add to expectations that the Federal Reserve will again ease off the stimulus pedal while the Bank of Japan and the European Central Bank press hard.
The foreign exchange market is the most sensitive to this economic and policy divergence. The dollar has already strengthened noticeably recently, and it will likely continue gaining against the euro and yen in particular. Over an extended period of time, though, the foreign exchange market will not be able to serve as the sole shock absorber in the global system without increasing the risk of financial instability down the road.
To ensure a more orderly global rebalancing, Europe and Japan need to strengthen competitiveness, increase infrastructure investment and deal with residual pockets of excessive indebtedness. This might close the performance gap with the US, helping the laggards grow faster without hurting the gains of the leader.
Growth overseas has a major role to play in strengthening the US labour market, including in helping to overcome structural headwinds. Only with an economic recovery in Europe and Japan can there be a more decisive economic lift-off for this country, and eventually for the rest of the global economy. – Bloomberg