"Washington's budget tightening appears to have finally hit the U.S. labor market, but so far it hasn't happened the way the nation's political debate suggested it would."
"The budget cuts across federal agencies starting March 1—known as sequestration—have long been expected to depress government payrolls as agencies implement hiring freezes and furloughs. But the March figures showed a relatively minor dip in the federal government workforce and little evidence of damage from the spending reductions, whose effect is expected to grow in coming months."
"Instead, a quieter decision from Washington three months ago appears to have caused more pain last month.The retail sector shed 24,000 jobs in March, likely a reflection of consumers starting to rein in their spending as their paychecks shrink from higher payroll taxes. As part of the fiscal-cliff deal in January, Congress allowed the Social Security payroll tax to revert back to 6.2% from 4.2%.
In reality it's a bit early to know how much pain it's causing in the job market. Nevertheless, it is arresting that it's first month is correlated with an immediate deterioration of the job market.
Recently, Sumner had been taking comfort in the fact that the economy seemed to be holding up in the face of the kinds of things Keynesians argue should slow down the economy and depress job growth. He had more than one post about how the payroll tax has not hurt the economy as the Fed was covering austerity. He had given us a definition of what "it would look lke if the Fed successfully offset fiscal austerity."
"Suppose a big investment bank went into 2013 as a Keynesian institution, believing that “fiscal headwinds” would lead to a growth slowdown, and then was mugged by reality. What would it sound like if they came to the conclusion that monetary policy would offset fiscal austerity, indeed more than offset fiscal austerity."
"They’ve just raised their Q1 growth forecast from 1.5% to 3.0%, and full year growth forecast to 3.5%."
"Market monetarists: Keynesians and Austrians who have been mugged by reality."
"PS. I do not think growth will be as strong as they do, but I do think the recent fiscal austerity will have almost no impact on growth, as it will be offset by monetary stimulus."
http://www.themoneyillusion.com/?p=20170
As this list of links suggests, the idea that austerity doesn't hurt provided it's made up for by the Fed is a very regular theme of his. Still I do think he deserves a little credit for some circumspection in the face of the numbers over the last few days that suggest a weakening of the economy.
"there is some evidence that sequestration is hitting the labor market. New unemployment claims are rising. Is that inconsistent with “monetary offset?” Of course not. Monetary offset can’t perform miracles. If the Fed did enough stimulus late last year to offset expected fiscal austerity in 2013, the high frequency data would still show variation from month to month, depending on exactly when the Federal layoffs actually occurred."
"Thus if the Fed was determined to keep RGDP rising at 2% despite austerity, you might see 3% RGDP growth in a quarter with no federal layoffs, and 1% RGDP growth in a quarter with layoffs. The Fed’s policy changes tend to occur about once per year, and hence cannot offset month-by-month real GDP growth rates. Monetary offset by the Fed will have failed (which is certainly possible) if RGDP growth for all of 2013 comes in under the 2% seen in recent years."
Last night, he reiterated that we should absolutely hold him to this prediction:
"Just so that you don’t think I always cop out on past predictions, post this one on your wall:
If NGDP growth during 2013 is less than 4%, or if RGDP growth is less than 2%, then I believe fiscal austerity will have reduced growth somewhat. In other words, I believe the Fed will have failed to offset the expected fiscal austerity with its QE3 policy of late 2013.
"Hold me to it."
Still, to the extent that yesterday's job numbers didn't reflect sequestration, it's even more sobering. Sumner had celebrated too early that the payroll tax cut sunset wouldn't hurt. If yesterday's numbers were more about the sunset than sequestration we may be looking forward to even worst deterioration. It also shows the folly of being too quick to declare anything in the face of early data. I mean it was obvious during February and March that it was too early to say categorically that the sunset wouldn't hurt. Those Republicans and their apologists who will tell us that yesterday's numbers had nothing to do with sequestration, they are falling into the same trap.
I'll give Scott some credit. Still who's being mugged by reality now. He did say that he thought Deutsche's 3% prediction was too high. However, based on yesterday's numbers analysts are already saying that GDP estimates need t come down.
Perhaps they will be less than 2% soon. Just a few days ago, even liberals like Greg Sargent were worrying that the Dems were losing the sequester wars on messaging. Perhaps the pain of the sequester though real was too diffuse?
That was just a few days ago. The worry about "diffuseness" has dissipated-GDP and job numbers are the opposite of difuse as everyone can wrap their heads around them and get why drops mean the economy is being hurt.
One big lesson then is not to celebrate too quickly. Sumner did and at least is qualifying himself now. When do you think the GOP will do the same?
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