Wall Street drew two conclusions from the news that the US jobs engine shifted down into a lower gear last month. The first – that a September increase in interest rates is now a non-starter – was almost certainly right.
Putting up the cost of borrowing so close to the presidential election in early November always looked like an outside bet. It would have taken thunderously good figures for job creation to have persuaded the more dove-ish policymakers at the Federal Reserve to move, and the ones released on Friday were average at best.
To be sure, the August non-farm payrolls have come in worse than expected for the past decade, suggesting that there might be some problem with the way the raw data is seasonally adjusted. What’s more, the two previous months – June and July – saw strong increases in demand for labour, so the three-month average for non-farm payrolls is running at a healthy 200,000. That could persuade some of the hawks at the Fed to move, but they will not be able to muster a majority.
The second conclusion drawn by Wall Street is more questionable. That is the assumption that the rate rise some analysts had pencilled in for September has now simply been put back to a later date. Some economists believe the Fed won’t waste any time once US voters have chosen who will be Barack Obama’s successor at the White House; some think the central bank will wait until March next year.
There is, though, a different way of looking at the numbers. For most of this year, the strength of the US labour market has been at odds with data showing the economy growing only slowly. Sooner or later, the theory went, growth would accelerate and come into line with employment numbers, so justifying higher interest rates.
But what if Wall Street has got things back to front? Is it possible that it is the labour market that has been giving off false signals and that eventually job creation will decelerate and come into line with a growth rate that averaged just 1% in the first half of 2016?
There is enough evidence to make this a plausible hypothesis. Take the details of the most recent jobs report, for example. The annual growth rate in average hourly earnings fell to 2.4%, its lowest in six months, while average weekly hours worked declined to 34.3, the lowest in two and a half years.
Hours worked by production and non-supervisory staff – who account for five out of six workers in the US – rose by 1.1% over the past year, the slowest rate of increase since 2010. None of this suggests the labour market is humming, nor that the recent pick-up in consumer spending – the economy’s only real source of growth in the first half of the year – can be sustained.
With investment weak and exports affected by low global demand and the lagged effects of the dollar’s previous strength, it is not immediately obvious why the Fed would raise interest rates any time soon. Over the past couple of years, the US has succeeded in creating millions of jobs, but most of them are relatively unskilled and attract low pay. There is no obvious inflationary threat.
Rather, the Fed should be focused on the risk that the economy might stall altogether. Corporate profits have come under pressure and this is leading to cuts in business investment. Historically, this is a good leading indicator that the US economy is heading into recession.
The softness of the US economy is a concern to the Fed’s chairwoman, Janet Yellen, who has rightly adopted an ultra-cautious approach to raising rates. It will also be a concern for Hillary Clinton. The state of the economy does her no favours in her battle with Donald Trump.
Now bosses actually have to ask not to get bonuses
News that David Brown, chief executive of Go-Ahead Group, has asked not to be considered for a bonus this year prompts an obvious question: why did he think he might get one?
Go-Ahead is the main company behind the chaotic Southern rail franchise that delivers daily misery to London commuters. If Brown’s £558,000 bonus from a year ago had been repeated, riots might have broken out on station platforms.
Not all Southern’s woes can be laid at the operator’s door, it should be said. The company doesn’t control the tracks, which is where some of the problems have arisen as Network Rail gives London Bridge a major upgrade.
But those difficulties have been compounded by Southern’s bitter battle with the RMT union over plans to hand responsibility for closing train doors from conductors to drivers. Whatever the rights and wrong of the dispute, Southern’s handling of the fallout has been appalling. Time and again, Brown has found himself apologising to customers for the sub-standard service. A bonus would have been another PR disaster.
In practice, however, the bonus question arises because the rest of Go-Ahead is doing OK. The bus operations and other parts of the rail business are up to scratch. Despite losses at GTR – the unit that includes Southern – Go-Ahead’s pre-tax profits rose 27% to £99.8m. So Brown might have expected a juicy personal reward.
But such a notion merely underlines the perversity of the modern bonus. No longer is it a reward for exceptional performance; instead, executives get them merely for delivering targets. In Go-Ahead’s case, meeting the target – in other words, doing your job – is worth an extra 75% of salary in normal circumstances; at other companies, the ratio can be higher.
This is a nonsense. Pay committees have become wedded to formulas that pay out even when disaster has struck in part of the empire. Boards should get a grip and apply common sense, which they are allowed to do. It should not have been a case of Brown doing “the right thing”. His chairman should have said no bonuses would be paid because Go-Ahead was failing its customers.
The best way to stop Hinkley is to agree to it
What should Theresa May say to her Chinese G20 hosts about Hinkley Point? Nothing. The PM only ordered a review of the £18bn project, which Beijing wants to part-fund, at the end of July. Hard conclusions probably haven’t been reached. Don’t risk a diplomatic quarrel on the other side’s turf.
A decision will have to be reached soon but an elegant solution seems to be emerging from Downing Street: tell the Chinese Hinkley is cleared for take-off but proposed nuclear plant Bradwell, in Essex, which the Chinese hope to build under their own steam, requires an in-depth security review.
The Chinese, we are led to believe, would take offence and abandon Hinkley. Good. The plant would be hideously expensive for bill-payers and developer EDF’s other two Hinkley-style developments outside the UK are years behind schedule. If Beijing packs its bags, the UK would have a choice: part-fund Hinkley; or let the plans collapse. Option B is best.
