A Solid Jobs Report, but Firms Are Wary

by Kevin Hassett

The news today that the economy added 146,000 jobs in November suggests that the solid-but-not-spectacular job market continues to provide a positive foundation for the economy as a whole. We have been inching along at an average rate of about 150,000 jobs per month, and continue to do so.

The solid jobs report contrasts, however, with other economic data that have been much more negative. In particular (and one might call this the revenge of the 1 percent) capital spending is dropping off the cliff. Orders for non-defense capital goods, for example, have dropped sharply five months in a row. Even with the stronger labor market, fourth-quarter GDP growth is looking like it could be fairly close to zero.

Firms are clearly wary of the future for two reasons. First, there is a risk that the fiscal cliff negotiations fail, and the economy enters a recession early next year. Second, much of investment is done by “pass through entities” that will be severely negatively impacted by President Obama’s proposed income tax hikes. Those who buy machines lose either way, and only would have an excuse for optimism if Republicans could be expected to pull a rabbit out of their hat. There’s not much chance of that happening, hence the depressing investment.

Even with the slowing, the stronger-than-expected labor market report likely will make the president bargain even harder with Republicans. Obama has argued that the economy is now strong enough that it can afford the hit associated with a tax hike. That argument would have been much harder to stick with if this jobs report had been as weak as many expected.