JVB-BSullivan-Econ-Comment-081009

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Broker Dealer / Institutional / Advisor Use Only
August 10, 2009
ABOUT
BILL SULLIVAN Jobs, clunkers, and the Fed
The employment situation report for the William V. Sullivan, Jr. this year. As a result, a double digit jobless
serves as Chief Economist month of July was interpreted by many rate before too long is distinctly possible, a
at JVB Financial Group, observers as a turning point for U.S. labor development that will resonate in both the
working closely with the market activity. Indeed, the moderate pace political and monetary policy arenas.
firm’s trading desk, of job losses in relative terms was viewed as a In view of the potential for a further rise
providing analysis and firm indication that the longstanding in the unemployment rate, the FOMC is still
commentary on the U.S.
recession was over and that the domestic likely to take a cautious approach regarding economy and the financial
economy was poised for a significant the economy’s overall prospects. No doubt, markets. Among his duties
recovery. While there is no doubt the data in the statement that will be issued at the are authoring a weekly
weren’t as grim as earlier in the year, there report on credit market conclusion of the August policy convocation
trends and maintaining a appeared to be several distortions that on Wednesday afternoon, the Committee will
regular schedule of suggest a genuine improvement in the call attention to the ongoing improvement in
conference calls that focus employment picture is still well in the future. financial market conditions, especially the
on interest rate Against that backdrop, the Federal Open rise in equity evaluations since the last
developments. He appears Market Committee (FOMC) at this week’s meeting in late June. Additionally, the
frequently on Bloomberg TV
meeting is apt to confirm once again that membership will probably judge the latest and is often quoted in
policy is on hold for an extensive period, pattern of household spending as Barron’s.
suggesting that the current target on Federal encouraging, particularly in the context of
Mr. Sullivan is the familiar funds could be maintained until at least early the strong response to the Federal
voice that JVB features on next year. Government’s rebate program for the
our weekly conference call, Perhaps the most significant quirk in the purchase of new vehicles. Nevertheless, the
where he discusses the July employment report was the number of Fed must acknowledge that business firms
economy and the events individuals that moved to the sidelines of the are continuing to cut staffing, as reflected in
that affect the marketplace.
labor market during the survey period. the contraction in July non-farm payrolls and
According to the Bureau of Labor Statistics, will probably view those reductions as a He was previously
the total number of people not considered in source of weakness for some time. Given associated with Morgan
the labor force last month increased by Stanley in New York City for this outlook for labor market activity, the
more than twenty years, 637,000. Since 1980, there have been only Committee should reinforce its preference
where he was an Executive five other months that had labor market for maintaining a historically low Federal
Director and a Senior withdrawals that exceeded the July, 2009, funds rate for an extended period.
Economist in the firm’s tally, underscoring the unusual nature of that Moreover, considering the level of support
Retail Fixed Income adjustment. There is little doubt that the that has been provided the banking and
Division. Bill published a
huge gain in this category contributed to the automotive sectors of the economy, it would widely quoted weekly letter
unanticipated drop in the nationwide be “politically untenable” for the central on the financial markets and
unemployment rate, the first decline in bank to withdraw liquidity from the financial was a frequent guest
fifteen months. Clearly, some of these commentator on several system before the pace of new job creation is
business networks, “dropouts” chose to withdraw from the restored to a level that reduces the
including Bloomberg TV, labor force, having been unable to find a job nationwide unemployment rate on a
CNBC, and Fox News. and, in turn, became a “discouraged” worker. sustained basis.
Eventually, these individuals will reenter the The Committee at this week’s meeting
Mr. Sullivan received his labor market setting which will likely set the will of course have to render a judgment as Bachelor of Arts Degree in
stage for a renewed climb in the nationwide to whether the “Cash for Clunkers” program Economics from Fairfield
unemployment rate to a new cycle high later (Continued on page 2) University.
Broker Dealer / Institutional / Advisor Use Only
WEEKLY ECONOMIC COMMENTARY BY BILL SULLIVAN—AUGUST 10, 2009 Page 2 of 2
(Continued from page 1)
chosen to take advantage of the support that is a tipping point for consumer spending or
is being provided by U.S. taxpayers. Once whether the stimulus will prove short-lived
this influence is removed, spending on new and actually create some downside risks for
cars could weaken considerably for at least the economy in the autumn and winter
several months, as underlying sales trends months. Clearly, the Government’s largess is
will be dominated by the prevailing changes being embraced by the car buying public and
in employment and income growth. Unless as many as 750,000 new vehicles may
households begin to experience a stronger ultimately be acquired by American families,
pattern of take-home pay, the net result of with most of the outlays transpiring in July
the “Cash for Clunkers” program may be to and August. The concentrated upturn in
shift prospective sales from later this year durable-goods related expenditures sets the
and the opening months of 2010, to the third stage for a strong performance in personal
quarter. This adjustment will undoubtedly consumption that should translate to a
buoy current economic growth, but could be positive reading for real Gross Domestic
laying the groundwork for renewed weakness Product for the third quarter. Whether the
in durables-related consumption and the projected jump in aggregate economic
general economy, just as the key holiday activity represents the beginning of a genuine
season draws near. ■ recovery process remains open to debate,
particularly if the job and income
William V. Sullivan, Jr. environments remain weak for several more
Chief Economist quarters. Although the success of the
JVB Financial Group Government’s program is undeniable, there
August 10, 2009 are several downside risks, in our judgment,
that need to be considered. As an example,
as these older vehicles are scrapped, there
will be a reduction in earnings capability for
many repair facilities and auto part suppliers.
Additionally, the acquisition of a new car is
almost always a credit sensitive purchase for
consumers. The program is thus essentially
encouraging households to take on a larger
debt load, with many families already having
extreme difficulty in managing their finances.
Conceivably, the rebates for new cars could
divert spending away from other
discretionary items, which could offset some
anticipated increase in auto-related
expenditures. The biggest challenge
forthcoming from this program, however, is
whether the support is effectively borrowing
from future sales. Many households that
may have been considering replacing their
vehicles in the next year or so may have
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2700 N. Military Trail, Suite 200 / Boca Raton, FL 33431
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