Ambrose Evans-Pritchard

7:34PM BST 02 May 2014

The US economy has delivered two minor shocks in a week, prompting concerns that bond tapering by the Federal Reserve may be doing more damage than expected.

Non-Farm Payrolls data released on Friday shows that the workforce shed 806,000 jobs in April, a stunning drop that cannot plausibly be blamed on the weather. Wage growth and hours worked were both flat and the manufacturing hours per week fell.

This follows news earlier in the week that the economy to a halt in the first quarter. Growth plummeted to 0.1pc and is now well below the Fed’s “stall speed” indicator. Analysts blamed this on the freezing polar vortex over the winter.

Yet the jobs data confirm a disturbingly weak picture. The headline unemployment rate fell to 6.3pc but that was only because the labour “participation rate” plummeted back to a modern-era low of 62.8pc, last seen in 1978 when there were far fewer women in the workforce. The rate for males is the lowest ever recorded at 69.1pc.

The jobs market is highly volatile – and is often revised later – but the data are a warning that the US recovery may be losing momentum. Lakshman Achuthan, from the Economic Cycle Research Institute, said the trend was already weakening long before the cold weather. “We see a failure to launch. We’re decelerating, not accelerating, and that is a big concern,” he said.

The Fed has gradually been turning down the spigot of dollar liquidity, reducing its bond purchases by $10bn a month at each meeting, even though the bank’s measure of core PCE inflation has dropped to 1.1pc. The net stimulus has dropped from $85bn a month to $45bn.

This is a form of monetary tightening. Interest rates have not risen – though they are rising in real terms – but the quantity of money mechanism may nevertheless be having a powerful effect. The broadest measure of the money supply – Divisia M4 – has dropped from a growth rate above 6pc a year ago to just 2.6pc in March.

The Fed is unlikely to blink yet. Even the once dovish San Francisco Fed has warned that quantitative easing no longer serves a useful purpose and may be doing more harm that good at this stage, fuelling asset bubbles without much benefit for the real economy. Analysts say it would take several months of bad data to force the Fed to halt tapering and change course again.

US policy-makers no longer pay much attention to the monetary data. Robert Hetzel, from the Richmond Fed, said this led to a grave error in mid-2008 when the Fed’s voting board began to talk up rate rises even though the money supply was already buckling. He argues that this played a key part in the Lehman crash several months later.

Erica Groschen, from the Bureau of Labour Statistics, said the sudden drop in jobs last month was caused by fewer people joining the workforce, rather than people leaving. That is hardly reassuring, and conflicts with theories that the participation rate is falling because people are choosing to retire early.

The weakness may be nothing worse than a pause for breath – or a mid-cycle correction – as the US gears up for a second leg of the post-Lehman expansion. The risk is that this instead proves to be the end of growth cycle that is already long in the teeth by historic standards.

The possibility of a fresh downturn with the interest rates already at zero, the Fed’s balance sheet already at $4 trillion, and gross public debt above 100pc of GDP for the first time since the end of the Second World War is what keeps US economists awake night. There is little margin for policy error.

Tags: Economy, JOBS, UNEMPLOYMENT