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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“No news” may be “good news” in the eyes of many publicity-shy corporate executives, but “no change” was definitely not the news anyone wanted to hear about the unemployment rate, which remained stubbornly, painfully elevated at 8.2 percent in June as employers added only 80,000 jobs for the month.

That disappointing gain ─ well short of more hopeful projections — followed an equally disappointing 74,000 gain in May. Hiring surged in the first quarter, averaging 226,000 jobs monthly, but has sagged since to levels well short of those needed to slash the unemployment rate or boost consumer confidence, which has also been trending downward.

“The current pace of hiring isn’t even enough to absorb the natural increase in the labor force, which grows by more than 100,000 workers each month,” a MarketWatch article noted.

Employment indicators before the Labor Department’s monthly report had hinted at better news. New claims for unemployment benefits had declined to the lowest level in six weeks, and ADP Employment Services reported that corporations added 176,000 workers in June after a revised 136,000 gain the prior month.

But increasing concern about tenuous economic conditions in Europe and Asia and uncertainty about how Congress will handle the approach of the “fiscal cliff” (shorthand for action on the Federal budget and tax policy decisions) combined with slowing in key sectors of the U.S. economy (manufacturing and consumer spending among them) have apparently short-circuited hiring plans at many companies, analysts say.

Fed Fears

Accumulating signs of weakness have also led the Federal Reserve, along with most economists, to slash their growth projections for this year and next. The Fed is now predicting that GDP will increase between 1.9 percent and 2.4 percent this year, down from the 2.4 percent to 2.9 percent range projected in April. Growth estimates for next year are now in the 2.2 percent to 2.8 percent range, vs. 2.7 percent to 3.1 percent in the Fed’s previous forecast. And Fed officials anticipate little change in the unemployment rate this year and not very much progress in 2013.

Citing that increasingly bleak outlook, the Fed’s Federal Open Market Committee (FOMC) decided to expand the so-called “Twist” program through the end of this year, replacing an additional $267 billion in short-term bonds with longer-term debt. “[This] should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the FOMC said in its post-meeting press statement.

“The economy is really in a difficult spot at the moment,” Jeremy Lawson, a senior U.S. economist at BNP Paribas, told Bloomberg News following the release of the June employment report. “With the labor market weak and the outlook for incomes weak, it’s hard to see how consumer spending can grow solidly.”

Housing Looking Better

The housing market, which has consistently lagged behind as other sectors of the economy have revived during the past two years, has reversed that pattern, showing some signs of improvement now as other sectors seem to be weakening.

Pending sales of existing homes, as measured by a National Association of Realtors (NAR) index increased by 15.3 percent year-over-year in May after a strong 15.7 percent jump in April. Existing home sales slipped a little in May compared with April, but they fell back from a lofty two-year high reached that month. And the major sales impediment was not lack of demand but lack of supply, NAR analysts said. A sharp decline in foreclosure sales and negative equity – preventing many owners who would like to sell from doing so – kept inventory levels low, preventing the “normal seasonal upturn” in supply that typically matches the seasonal surge in buyer demand, Lawrence Yun, the NAR’s chief economist, explained.

The “shadow inventory” of foreclosed homes that haven’t hit the market yet, but will eventually, makes some economists question the staying power of the housing market rebound. “Any meaningful strength [in home prices] is going to bring out this inventory and will crush the recovery,” Michael Feder, chief executive of Radar Logic, told Market Watch.

Recovery Has ‘Staying Power’

Others, including the NAR’s Yun, are more confident that the current rebound has staying power. "Even with the monthly decline, home sales have moved markedly higher with 11 consecutive months of gains over the same month a year earlier," he noted in a press statement.

New home sales, which have been the weakest link in the housing chain, provided additional encouragement for the optimists in May, posting a 7.6 percent year-over year gain. Although the annual sales pace (369,000 units) was less than half what is traditionally viewed as a healthy market, it was the fastest in more than two years and a sign to many that the reeling housing market has finally regained its balance after a five-year swoon.

“With no excess inventory of unsold new homes, any sustained rebound in new home sales should quickly translate into firmer prices,” Steven Wood, chief economist at Insight Economics, told the Washington Post.

Home builders apparently share that view. Confidence levels, measured by a National Association of Home Builders-Wells Fargo index, hit a five-year high in May, and permits for new construction – an indicator of future construction activity — increased by nearly 8 percent. Residential starts declined overall, but the drop was entirely in the multi-family sector; single-family starts increased by 3.2 percent to a five-month high.

Home prices also are showing signs of strength – or at least, less weakness. Prices rose month-over-month in the 10-city and 20-city Standard & Poor’s/Case-Shiller indexes, both of which reached their highest levels this year. Year-over year, prices were off by 2.2 percent and 1.9 percent in the 10- and 20-city indexes, respectively, but the rate of decline was also slower in both.

A one-month report doesn’t represent a trend, David Blitzer managing director and chairman of the S&P index committee, acknowledged. But it was significant, he told the Washington Post, that the cities reporting the strongest price gains (Phoenix, Las Vegas and Miami) were among those hardest hit by the downturn.

“When the worst ones begin to turn around,” Blitzer noted, “that’s a good sign.”