Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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The biggest economic story for March was the miniscule (read that “virtually non-existent”) improvement in the employment picture. “Yuck” was how MarketWatch described the Department of Labor report, which showed that employers added only 88,000 jobs for the month. The smallest gain in the past nine months, the March total fell miles below the most pessimistic of forecasts that had been growing increasingly pessimistic in the week preceding the labor report, as key indicators, including an increase in initial unemployment claims, had begun signaling cause for concern.

The unemployment rate ticked down a notch, to 7.7 percent and the labor force participation rate fell to 63.3 percent, its lowest level in more than 30 years, but both were negative indicators, reflecting an increase in the number of discouraged workers who have abandoned their job search, rather than an increase in the number of unemployed workers who have found jobs.

Analysts who had been predicting that the across-the-board government budget cuts mandated by the ‘sequester’ would drain energy from the economic recovery said the disappointing (with a capital ‘D’) employment report proved their point.

Validation for the Fed

The anemic jobs report also undercut arguments that the Federal Reserve should begin backing away from its easy-credit policies to avoid inflationary risks, while validating Fed Chairman Ben Bernanke’s view that the economic recovery is not yet strong enough to warrant a change in the Fed’s policies. As recently as mid-March, before the most recent employment report, Bernanke had restated the Fed’s determination to stay the low-interest-rate course until the employment picture looks consistently brighter. “We are seeing improvement” in labor market conditions, he acknowledged at a press conference, noting the employment gains reported for January and February. “[But] one thing we would need is to see that this is not temporary improvement.”

Apart from the employment report, other economic indicators were mixed, with more positives than negatives.

  • GDP increased by 0.4 percent in the fourth quarter, beating most estimates, as business spending increased more and the trade gap increased less than initially estimated.
  • The Index of Leading Economic Indicators also managed a small but significant 0.5 percent increase in February, the second consecutive gain for this benchmark gauge of future economic growth, suggesting that the economy may strengthen further in the second half of this year.
  • Manufacturing emitted flickering signals. The Institute of Supply management’s (ISM’s) factory index fell to 51.3 from what had been a nearly two-year high, remaining above the 50 mark separating growth from decline, but skirting close enough to the border to make some analysts fear that the recovery may be losing traction. On the other hand, factory orders reported by the Commerce Department posted their largest increase in five months in March. The critical service sector slowed, but even with a decline from 56 to 54.4, the ISM’s non-manufacturing index “is still at a healthy level,” Anthony Nieves, chairman of ISM’s non-manufacturing survey committee told reporters. “I’d rather see slow, incremental growth that is sustainable,” he added.

Confidence More or Less

Meanwhile in the consumer sector, recent confidence reports indicate that the sequester is either undermining confidence, or not, depending on which survey you want to follow. The Conference Board’s index fell sharply in March, to 59.7 from 68 the prior month, with the largest decline in future expectations (60.9 vs. 72.4 in February) and a smaller dip in the present situation index – 57.9 vs. 61.4.

Lynn Franco, director of economic indicators for the Conference Board, blamed the sequester for “creating uncertainty about the outlook. As a result,” she said, “consumers are less confident.”

Pollsters for other surveys must have been talking to different pools of consumers. Bloomberg’s Consumer Comfort Index reached its highest level so far this year in March while the Thomson Reuters-University of Michigan confidence index increased to 78.6 from 77.6, reversing a sharp decline (to 71.8) in the preliminary reading for this gauge. Survey Director Richard Curtin said the results indicated that consumers have largely dismissed concerns about the impact of the sequester.

The poor labor market report could certainly turn these currently positive confidence surveys more negative next month, but other indicators suggest that consumers remain more resilient and less unnerved by the sequester than analysts have predicted. Consumer spending increased by 0.7 percent in February, beating estimates with the largest gain in five months as incomes increased by 1.1 percent after declining by 3.7 percent in January.

“Both numbers are consistent with a continued recovery of the U.S. economy,” Kathy Lien, managing director of BK Asset Management, told Reuters.

Continuing its climb out of the recession-induced depths, household wealth increased by $1.17 billion in the fourth quarter, reaching its highest level in five years, propelled largely by gains in home prices.

Housing Market Still on Track

The housing market continued to generate mostly positive numbers, making it more difficult, although not impossible, for skeptics to question the sustainability of the housing recovery. Existing home sales increased by 0.8 percent in February to a seasonally adjusted pace of 4.98 million units, the highest level in more than three years. Inventory levels increased a little but remained firmly in seller’s market territory at 4.7 percent, nearly 20 percent below the year-ago mark. Industry analysts insist that the February inventory increase reflects a lack of homes available to purchase and not a shortage of consumers interested in buying them.

“Only new home construction can genuinely help relieve the inventory shortage,” Lawrence Yun, chief economist for the National Association of Realtors (NAR), said in a press statement. “Housing starts need to rise at least 50 percent from current levels,” he added.

Starts aren’t up 50 percent, or anywhere close to that, but they have been improving fairly steadily. February starts were up 0.8 percent overall compared with January and 27.7 percent higher year-over year. Single-family starts alone were 31.5 percent higher year-over year and multi-family starts were up 18.87 percent.

Building permits, an indicator of future activity, reached an annual rate of 946,000 units, 4.6 percent above the January pace, a robust 30 percent year-over-year increase and 90 percent above the recessionary depths. Admittedly, that’s a little like comparing someone with a detectable pulse to someone who has been dead a week, but still…..

Although optimists cheered the home construction stats as evidence that “we’ve come a long way,” while pessimists concluded, “we still have a long way to go,” the differences turned mainly on how quickly the recovery will proceed rather than on whether it has begun. The consensus seems to be that the recovery is well-established and will be steady and sustainable, slowed by occasional bumps in the road but unlikely to be undone by them.

Bump in the Road

New home sales apparently hit one of those bumps in February, falling below the January level (which was itself revised downward by 6,000 units), but still remaining more than 12 percent above the year-ago level.

Home prices, meanwhile, extended a recovery that began almost a year ago. The Standard & Poor’s-Case-Shiller index jumped by more than 8 percent year-over-year in January, recording its largest gain in six years, with gains logged by all 20 cities the index tracks. This closely-watched housing barometer has increased in 12 consecutive months, a level of consistency suggesting that the housing recovery is real and sustainable, but also triggering fears that a bubble may be forming.

Economist Robert Shiller, co-creator of the index that bears his name, is among the analysts who see cause for bubble concerns. Although housing is still clearly in recovery and not rapid-growth mode, Shiller concedes, “one thing you learn from history is that bubbles can occur at any time,” he told CNBC.com.

He thinks the Fed’s low-interest-rate policy and the out-sized role Fannie Mae and Freddie Ma continue to play in the home finance arena pose particular risks, creating a “totally artificial real estate economy” that, he says, “makes it very hard to forecast home prices.”

With or without a disruptive bubble, Shiller thinks it will be at least 40 years (about the time Moses spent wandering around the desert) before home prices emerge from their wilderness and return to pre-housing-meltdown levels.

Zillow’s far more optimistic forecast anticipates that prices will increase by 4 percent annually over the next five years, handily exceeding the pre-bubble average annual appreciation rate of 3.6 percent.

David Blitzer, chariman of the Index Committee at Standard & Poor’s (Case-Shiller’ s index partner) also stands firmly on the upbeat side of the appreciation forecasts, viewing January’s 8 percent home price increase as “clearly buoyant” and telling CNBC.com that the housing market “seem to be cranking on all cylinders.”

Stan Humphries, Zillow’s chief economist, agrees. “The housing market recovery has continued to gain momentum over the past several months and looks firmly entrenched as we enter the 2013 spring home shopping season,” he said in a recent report. Continuing gains in home prices will pull more underwater homeowners above the negative equity line, Humphries predicts, enabling them to sell homes to which they have been financially tethered. The increase in available homes, buoyed further by new construction, “will ease supply constraints,” Humphries suggests, “and as more supply comes on line, home value appreciation rates will moderate and stabilize, marking the final transition from a recovering market to a healthy and sustainable market.”