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Today's employment report was disappointing, writes Mohamed El-Erian. Nonfarm payroll employment declined by 131,000 in July, the rate and duration of unemployment remain stubbornly high, and other structural dimensions of the problem are deteriorating.
The disappointment is not limited to July. Friday’s news also included unfavorable revisions to data released in previous months.
There is a real worrisome human dimension to all these indicators. More Americans are struggling to earn enough to maintain their standard of living. A significant portion of people who are unemployed have been for so long as to materially reduce the chance of getting a job any time soon. And the "crisis of middle class America," as detailed by Edward Luce in last Saturday's FT, will get worse.
These concerning social aspects complicate the already-polarized political atmosphere in Washington, DC. They also accentuate the economic and financial challenges.
The employment picture constitutes yet another headwind"”and a significant one"”to the already-faltering US recovery. It will undermine future spending, company earnings and profitability. Indeed, the poorer the employment picture, the greater the likelihood that households will become more cautious and that the corporate sector will further increase its self-insurance. This is being reflected in today's market moves, including the equity sell-off and the further rally in government bond markets.
With an FOMC meeting coming up next week, today's job report also brings into sharper focus the dilemma facing monetary policy. Witness the increasing calls for the Fed to do more. Among those putting pressure on the Fed, some are calling for extending the "extended period" language; others advocate the resumption of asset purchases; and some are going as far as suggesting explicit ceilings on interest rates.
All this comes at a time when policy rates are already exceptionally low, the Fed has already signaled its intention to keep rates there for an "extended period," and the institution's balance sheet has already mushroomed with all the asset purchases completed a few months ago.
The limited effectiveness of "exceptional" measures to date should curtail expectations on what the Fed can reasonably deliver. Moreover, the bond market is already pricing in a zero policy rate for a very, very long time; and while asset purchases have helped, they have also involved collateral damage and unintended consequences.
The time has come for Washington to realize that the existing policy mix is not appropriate for the task at hand. Doing more of the same"”DC's version of "active inertia""”is not sufficient to counter the weak and "unusually uncertain" outlook for the US economy.
Pending a change in policy mix which is anchored by meaningful structural policies, the equity market is unlikely to sustainably regain its composure and yield levels will continue to surprise on the downside. More importantly, Americans will continue to suffer in large numbers and for longer.
The writer is CEO and co-CIO of PIMCO.
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