by John M. Curtis
(310) 204-8700

Copyright March 9, 2015
All Rights Reserved.

            When markets closed Friday, March 6, the Dow Jones Industrials lost 278 points or 1.5%, hinting at things to come with Wall Street news reports citing an overly heated market.   After the closing bell Friday, the Labor Department reported a gain of 295,000 non-farm jobs, signaling more economic growth, rising Gross Domestic Product, and, yes, possibly interest rate hikes by Federal Reserve Board Chairman Janet Yellen around mid-year.  With the Frankfurt-based European Central Bank starting a $66 billion a month bond buying program comparable to the Fed’s QE1, started in Nov. 2008, Yellen said the Fed will show “patience” to start tightening monetary policy.  When the jobs reports showed the unemployment rate dropped from 5.7% to 5.5%, Wall Street started to get nervous.  Any hint of interest rate hikes prompts Wall Street to sell off, watching today’s sideways movement.

             Celebrating the six-year anniversary of the current bull market today, Wall Street advanced again, recovering half of Friday’s losses, with the Dow rising 138 points or .78%, ignoring worries about Yellen spoiling Wall Street’s parade.  Only two weeks ago at the Fed’s Open Market Committee meeting, Yellen indicated she’d show “patience” before backing off the accelerator.  Friday’s jobs report pushes Yellen to show less patience unless the low quality of current U.S. jobs prevents the economy improving GDP.  Economists worry that despite the sharp drop in the unemployment rate, there’s too many people with low-paying part-time jobs to make a difference in the nation’s GDP.  Since 70% of the GDP is linked to consumer spending, there are real doubts that the current job market can adequately boost the GDP.  If GDP growth hits three percent, Yellen will feel pressure to hike rates.

             Throwing the GOP for a loop, the economy continues to confound the Republican narrative heading into 2016.  Former 2012 GOP presidential nominee former Massachusetts Gov. Mitt Romney warned voters about Obama’s sluggish economy, despite strong Commerce and Labor Department numbers.  If the election were held today, it would pose real problems for the GOP.  Republicans can’t attack Obama’s economy without raising eyebrows in the face of overwhelmingly positive numbers.  “I certainly think [the market] is very worried about the Fed [which] created this financial market dream world environment,” said Jack Albin of Montreal-based BMO Private Bank.  Albin thinks that even if Yellen raises rates, economic growth will trump the Fed’s actions.  What Albin doesn’t admit is that rate hikes could trip up the fragile economic recovery.

             U.S. economic recovery benefited by a lowered trade deficit because to the relatively high cost of the euro.  As the euro erodes toward parity with the U.S. dollar, European goods will look more attractive to foreign investors.  What looks like the good times rolling today, could screech to a halt if Yellen hikes rates too soon.  Worried about deflation, Japan’s Central Bank lowered rates Feb. 18 below zero percent, actually paying banks to borrow money.  Since 1985, Japan’s economic growth has been near zero, prompting the Bank of Japan to keep interest rates at rocket bottom.  Since lowering Federal Funds Rate to zero to-a-quarter-of-a-percent Dec. 16, 2008, former Fed Chairman Ben S. Bernanke hoped to avoid another Great Depression.  Despite the strong stock market performance since bottoming out March 6, 2009, Yellen knows that any Wall Street slowdown would kill the recovery.

             Unlike past recessions, where a strong labor market bails out the economy, today’s economy recovery is uneven in many regions of the country.  Retail spending, accounting for some 70% of U.S. GDP, remains sluggish, despite the drop in unemployment to 5.5%.  A Nov. 14, 2014 Labor Department report showed that two factors are killing the current labor market from contributing to an improved U.S. GDP:  (1) 50% rise in part-time employment and (2) the preponderance of minimum-wage jobs.  When you consider the most of the part-time jobs don’t include health insurance, it’s no wonder ordinary consumers have no money during this economic recovery for more consumer spending.  Yellen—and Wall Street—are kidding themselves about a rate hike in June.  Until the Fed can find a fix for the part-time and minimum-wage jobs the economy will move sideways.

             When you consider the global economic dependency, especially with Europe, it’s doubtful that the real U.S. economy is much better than the numbers in Europe showing an economic stall.  With Yellen ending QE3 Oct. 28, 2014, it’s premature to talk about hiking interest rates, even if nominal 2015 GDP improves to three percent.  Yellen knows that economic indicators point to deflationary bias, showing little chance of inflation  Because of the economy’s growing dependence on Wall Street to drive economic recovery, the Fed must come up with a better plan than hiking rates.  Yellen’s done little to fix the flagging real estate market.  Until Yellen can figure out how to create full-time jobs with benefits, there’s little chance that consumers will bail out the economy anytime soon.  With the GOP controlling the House and Senate, there’s even less chance of getting more good-paying government jobs.

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