


There were no obvious black marks in the report. November payroll growth was revised up to 161,000 from 146,000. Within December’s numbers, total private payrolls rose 168,000 as government returned to its familiar role as a drag on overall hiring. Construction and manufacturing both posted solid gains, encouraging signs for two sectors which customarily set the trend for the overall economy. Retail trade did slump 11,300, which will be taken as a sign of a flagging consumer, especially since retailers reported disappointing holiday sales. But that drop followed two months of robust gains.

The household survey showed employment growth of just 28,000. The household and payroll surveys often diverge, and that gap is not especially large. The labour force did grow enough to keep the participation rate (the share of the population working or looking for work) unchanged at a still depressed 63.6%. Including discouraged workers and involuntary part-timers, the broader measure of underemployment was unchanged at 14.4%.

Employment ended the year up 1.4%, exactly the same rate of growth recorded over 2011.That's not much to shout about—it's roughly consistent with an economy at full employment growing at trend, not one with still plenty of slack. But it's pretty good considering the uncertainty that bombarded businesses and households throughout the year, and December in particular. Nor is the report the only sign the economy has held remarkably well. Unemployment claims have dropped back to the level that prevailed before Hurricane Sandy hit the northeast at the end of October, and according to some analysts actually show signs of strengthening labour demand. Car sales rose 19% in December from November’s hurricane-depressed level, finishing the year on a high note at a 15.4m annualised rate. For the year, sales rose 13% to 14.5m, the most since 2007.

That all this happened while wrangling over the fiscal cliff (a combination of tax increases and spending cuts scheduled for the start of 2013) reached boiling point speaks to how the private sector has discounted the perpetual dysfunction that passes for American governance. There’s plenty of fear on both Wall Street and in Washington that fiscal wrangling over the cliff will ensure continued stockmarket volatility and subdued business confidence for the next few months. I’m not so sure. As I’ve argued elsewhere, fiscal brinkmanship has become as routine in Washington as bullets and bombings were in Beirut during its civil war. Markets and business have learned to live with the fiscal equivalent of continuous civil war, as the people of Beirut did with the real thing. Of course, if politicians actually go over the brink this time instead of just threatening to, then the market reaction will be quite violent and the economy will take a beating.

But I think there’s probably too much focus on what might happen between now and March when the sequester, debt ceiling, and federal budget funding must be addressed, and what is almost certain to happen, given the tax bill that Barack Obama signed into law this week. BofA/Merrill Lynch reckons expiration of the payroll tax cut subtracts $120 billion from household purchasing power, and increased taxes on the rich take another $60 billion. Then there’s several forgotten items such as the spending caps agreed to as part of the debt ceiling deal in 2011, and expiring stimulus. That’s a total of $285 billion, or about 1.8% of GDP (see nearby table). If the sequester (automatic cuts to federal spending), which the tax deal delayed until March, do occur, the hit rises to 2.1% of GDP, and most of that will be felt in the first half of the year.

Since not many 2013 paychecks have gone out yet, we won’t know for a while what the economic impact of this new austerity will be. It may not be that severe if the underlying momentum in the economy is strong enough. There’s decent evidence of just that. Average weekly hours rose to 34.5 from 34.4 in December, and wage growth has also picked up. Hourly earnings were up 0.3% on the month and 2.1% on the year. A few more months of that would produce enough income to make up for the higher payroll tax in 2013.

What does this picture mean for the Fed? The minutes of the Federal Open Market Committee, released on January 3rd, suggest Fed officials remain concerned that fiscal austerity will keep the economy on the backfoot this year and still in need of plenty of stimulus. The Fed is currently buying $85 billion worth of Treasury and mortgage backed bonds per month via quantitative easing, or QE, which means printing money. What caught investors’ attention, however, was the revelation that “several” of the FOMC's 12 voting members “thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013.” Going deeper into the minutes, this sentiment appears more widespread once seven additional non-voting members are included. Leaving aside members who wanted to stop QE right away, the remainder “were approximately evenly divided between those who judged that it would likely be appropriate for the Committee to complete its asset purchases sometime around the middle of 2013 and those who judged that it would likely be appropriate for the asset purchases to continue beyond that date.” So the median member probably wants to stop between the middle and end of 2013. Ben Bernanke, the chairman, is probably toward the later part of that range. By contrast, the median primary dealer surveyed by the New York Fed had thought QE wouldn't stop until the first quarter of 2014.

Keep in mind that the median dealer also thought GDP would only grow 2.1% in 2013, fourth quarter to fourth quarter, whereas FOMC members thought it would grow 2.3% to 3%, a strangely upbeat forecast given their own, and the Fed staff’s, concern about fiscal drag. If the Fed once again proves itself too optimistic, the case for further stimulus will remain relatively firm through 2013.

Yet there is a less benign scenario: that growth remains disappointing, but QE stops anyway. Fed officials have always predicated more QE on its benefits exceeding its costs. By the end of 2013 the median Fed member may be worried enough about the impact of zero rates on risk-taking, the Fed's growing ownership of the bond market, and the size of its balance sheet to call a halt to QE even if an economic case for more remains. With fiscal policy now turning decisively contractionary, America had better hope the animal spirits of business have revived enough for growth to continue without the help of policymakers.