The new normal

US jobs: The employment situation is starting to look a little out of step with policy. October’s solid non-farm payroll employment growth of 151,000 suggests the US economy may be gaining traction, especially as the service sector and temporary help showed some positive signs. With the recovery inching toward a more normal track, it reinforces the need to move to normal fiscal and monetary behaviour.

More than twice as many jobs were created last month than were expected. What’s more, an extra 110,000 jobs showed up in revisions for both August and September. Gains in services, retail, healthcare and private-sector education all provide good signals. And an increase in temporary positions — some 35,000 of these in October — is generally a harbinger of more permanent jobs to come.

True, these latest data are only modestly higher than the natural monthly labour improvement. But, normal sounds good about now, and the last three months combined demonstrate that the US economic recovery is now close to creating a “normal” number of jobs over a sustained period. That starts to call into question sustaining the exceptional fiscal and monetary stimuli of the last two years.

Financially speaking, a major tax increase, such as the one that would be imposed by letting the Bush cuts expire, could damage the economy. Thankfully, President Barack Obama is hinting at a compromise with Republicans that would at least temporarily extend these. Much-needed spending cuts would also help shrink the deficit and provide more room for the private sector to expand.

On the monetary side, these job figures imply further stimulus wasn’t warranted. Since wages and working hours continue to increase, albeit at modest rates, the inflationary danger from additional quantitative easing is considerable. Add to that the destabilisation seen in commodity markets and the encouragement to protectionism the latest pseudo-money-printing has created, and the short-term balance of risk ought to start shifting toward tightening.

Obama and Federal Reserve Chairman Ben Bernanke should draw some measure of encouragement from these figures. But they should also regard them as a sign that it’s time to revisit their fiscal and monetary theses.