Let it ride

By R.A. | LONDON

NEVER mind government budget cuts and shutdowns, weak growth in the emerging world and a summer disturbed by gyrations in financial markets. The American economy is plugging along at a surprisingly steady clip and dragging employment with it as it goes. According to new data from the Bureau of Labour Statistics, the American economy added 203,000 jobs in November. That's a shade above the average of 195,000 net new hires per month over the past year (though not meaningfully so given the margin of error). In the 12 months to November private firms added 2.3m new workers: not the best performance of the recovery but well above average.

The jobs figures are just the latest in encouraging news from around the economy. Output grew at a 3.6% annual pace in the third quarter of the year. That was one of the best quarters of the recovery (though temporary adjustments in inventory accounted for about 1.7 percentage points of the rise). Initial unemployment claims have dropped below 300,000 and are now at healthy levels for a recovery. And both consumer sentiment and manufacturing activity are on a tear.

The run of good news, particularly coming as it has on the heels of another near-disastrous budget battle in Washington, has many expecting the Federal Reserve to trim its asset-purchase programme at this month's meeting. The unemployment rate in today's jobs report dropped to 7%, which was at one point given as a threshold at which "tapering" would become likely. Fed officials may be concerned that while the unemployment rate has declined 0.8 percentage points over the past year, the ratio of employed workers in the population has hardly budged and the labour-force participation rate has fallen. Both could be interpreted as signs that long-term unemployed workers in the economy are no longer hire-able.

But a December taper seems unlikely. There are still 11m officially unemployed workers in the economy. It has been four and a half years since the recovery began, and employment has yet to reach the pre-recession employment peak (to say nothing of the pre-recession trend, which may never be regained). Recent job growth, while in some ways surprising and encouraging, is hardly the fastest of the recovery period, and bursts of rapid employment growth have repeatedly fizzled out over the past four years, as the Fed too quickly turned to talk of tightening. There are some reasons to think recovery might be more robust this time. Growth around the world is perking up a bit, even in crisis-scarred Europe. And the drag on output and employment from government cutbacks is easing. But having been burnt so many times the Fed may be reluctant to step on recovery once again.

There will no doubt be some contentious debate within the committee, particularly given activity in financial markets. American equities keep marching to new highs. Recovery in housing markets has slowed a bit from a torrid pace earlier in the year, but some worry about the return of dubious financial practices on Wall Street.

Those voices will probably lose out this time around, and inflation will be the decisive factor. Despite the relatively rosy jobs report, average wage growth, at 2%, remains well below normal levels. And core inflation remains stuck at around 1%, half the Fed's official target. The Fed has given every indication that its unemployment thresholds will not prompt immediate action if inflation is too low and not moving back to target. With employment growth steady but not break-neck, unemployment high, and inflation and wage growth very low, it is hard to imagine the Fed pulling the trigger on a taper in December.