Goldman Sachs: Substantial Improvement in Unemployment Rate Coming

As I have written, those watching the data closely are going to be among the first to recognize that the economy is going to "improve" and that the employment situation will reverse its decline.

Jim O’Neill, chairman of Goldman Sachs Asset Management, is among the first to detect this trend. In a column today at FT, he writes:

My hunch for the surprise of 2011 is that the US will positively shake people up.....Against this background, most reliable coincident and leading US economic indicators have improved in an accelerating fashion since November, including the critical monthly ISM manufacturing survey and weekly job claims. Last Friday’s improvement of 103,000 in monthly jobs is likely to be the start of a more substantial improvement that will bring down the unemployment rate.

O'Neill is clearly able to see a freight train when it is in front of him. Keynesian that he is, though, it's difficult for him to understand that Fed money manipulation is behind the "recovery". The closest he gets is this paragraph where he emphasises the role that  Fed jawboning  has played in pushing the economy:

...the behaviour of both the Federal Reserve and post midterm election Congress has probably allowed the momentum to take the US back into its growth trend. The strong asymmetry in which the Fed told everyone last autumn that it was going to undertake additional monetary stimulus and minimise the likelihood of deflationary pressures was exactly what was needed

Huh! I would like to see how the Fed jawboning would have worked without the 7% annualized growth in M2 money supply since November.

Since he is a Keynesian ( A Keynesian in the age of Krugman!), there is no hint by him that accompanying this manipulated recovery will be a huge spike in price inflation by mid-year. This despite the fact that the Fed's jawboning, if it did anything, it probably intensified the reversal of the desire to hold cash balances, which will result in even more impetus toward higher prices.
Interestingly, in a non-Keynesian fashion, O'Neill does hail the recent climb in savings, and does recognize the importance of savings:

....the US has been steadily seeing sizeable improvements since the horrors of late 2008 as its saving rate has risen to 5-6 per cent. Most credible research to my mind suggests that the US really needs to have a personal savings rate in the 8-10 per cent vicinity on a permanent basis, so the US is not there fully yet but arguably it is much closer.

But what he doesn't get is that this blip up in savings is temporary in nature and largely the result of the climbing desire to hold cash balances (and near cash balances) during the height of the financial crisis.

As the crisis environment continues to dissipate, and especially as the price inflation becomes more evident, this climb in savings will disappear.

O'Neill attempts to put the recovery on the emergence of the BRICs as important economic players. While the removal of some central planning pressures among the BRICs is certainly a plus for the global economy, it will have nowehere near the impact that the Federal Reserve money printing operations will have on the U.S. economy. Especially since BRIC member China is entering  the early stages of the downside of the business cycle!

Bottom line, O'Neill's tortured theories make it difficult for him to see the full picture, but as a strong data watcher, he sees what is in front of him, and that right now is the Bernanke manipulated recovery. He will likely also, down the road, be ahead of the pack in spotting the accelerating price inflation.