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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There is no question that economic reports have been gloomy of late, but they have also been perverse. It’s almost as if malevolent spirits bent on confounding the experts are producing streams of data that seem to establish a pattern, and then releasing just enough contradictory data to challenge the pattern they’ve set.

A recent case in point: An analyst quoted in CNN-Money article cited declines in consumer confidence and spending as unequivocal evidence that the economy has toppled headlong into another recession. The same day brought reports that second quarter estimates of economic growth had been revised upward¸ consumer confidence had improved, and manufacturing activity, which had appeared to be slipping, had strengthened – not a lot, mind you, but just enough to make the pattern a little murky and the conclusions a little less clear.

And so the debate over whether a new recession – or an extension of one that some contend never ended – is under way, inevitable, or unavoidable, continues. To be clear, no one is predicting robust growth; the question is whether whatever growth this anemic recovery is able to muster will be strong enough to prevent a double dip.

The current consensus seems to be leaning more toward recession than against it. “It’s either just begun, or it's right in front of us," Lakshman Achuthan, the managing director of the Economic Research Institute (ECRI), told CNNMoney. "But at this point that's a detail. The critical news is there's no turning back. We are going to have a new recession."

Recession Risks Rising

“There is growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession,” Ken Goldstein, a Conference Board economist, said in a recent press statement. “While the chance of that happening remains below 50-50, the odds have certainly increased in recent months.”

Harvey Rosenblum, the Dallas Federal Reserve Bank’s chief economist agrees. He sees the economy sitting on a “knife edge,” poised precariously between growth and decline. “The economy is moving along at stall speed," Rosenblum said at a recent business conference. "Unless we start moving a little bit faster, we are at a tipping point where things may not go the right way."

Federal Reserve policy makers share that concern. Citing “significant down side risks,” the Fed’s Federal Open Market Committee decided to extend the average maturities in its portfolio – a “twist” strategy, pointing to more aggressive financial easing in the future. The committee also announced plans to try to bolster the housing market, perceived as a serious drag on the recovery, by reinvesting maturing housing debt in mortgage-backed bonds.

“The Fed is trying to drive down mortgage rates to the lowest possible level, to get people to refinance, get more disposable income in people’s pockets,” Michael Dueker, chief economist for Russell Investments North America in Seattle, told Bloomberg News.

Better and Worse

Concerns about the European debt crisis – and inconsistent efforts by policy makers there to deal with it – continue to roil the U.S. stock market and rattle business and consumer confidence, overshadowing economic reports that have been, at least in some cases, better than expected. That may be damning with faint praise, but still:

  • The economic growth rate for the second quarter was revised upward to 1.3 percent, topping the Commerce Department’s initial estimate of 1 percent and beating the consensus forecast of 1.2 percent, as well.
  • The Institute of Supply Management’s (ISM’s) factory index climbed to 51.6 last month from 50.6 in August, surprising analysts, who had predicted a decline. ISM’s Business Gauge, another measure of manufacturing activity, increased to 60.4 in September from 56.5 in August, while its production gauge increased to 65.3 – the highest level since April – driven by increased demand for new orders. The manufacturing reports point to “an economy that continues to move sideways, certainly not one that is falling off a cliff,” Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York, told Bloomberg.
  • The service sector also grew more than expected. The ISM’s index of non-manufacturing activity increased to 53.3 in August from 52.7 in July – another indication that the recovery, though anemic, has more staying power than many analysts have assumed.
  • Consumer confidence rebounded – a little – in September from the depths to which it had sunk. The Thomson Reuters/University of Michigan’s gauge of consumer sentiment came in at 59.4 for September, up from the initial reading of 57.8 earlier in the month The Conference Board’s confidence index for the month remained essentially flat at 45.4, as the measure of current conditions declined to 32.5 (the lowest level since January) from 34.3 in August. But the future expectations index rose (though not much) from 52.4 to 54. While jobs, or the lack of them, remain a major concern¸ the proportion of consumers who expect the job outlook to improve in the next six months increased a tiny bit, from 11.8 in August to 12 in the September survey.
  • No one is predicting a glowing employment report for September, but the Department of Labor reported that companies advertised 3.2 million available jobs in July, the largest number of openings in more than three years. Competition for those jobs will be intense, however. With nearly 14 million unemployed workers in the market, there will be 4.3 million candidates looking to fill each of these available positions.
  • Indicators for consumer income and sending have been mixed. Consumer income fell by 0.1 percent in August, the first decline in this measure in more than two years. But consumer spending, which would be expected to follow suit, hasn’t yet. The rate of spending growth slowed in August to 0.2 percent after rising 0.8 percent in July, but spending hasn’t turned negative — yet. The savings rate did fall, however, to 4.5 percent, the lowest level since December of last year, suggesting that consumers are tapping savings to offset falling incomes and the rising cost of food and gas. “Consumers are making measured choices,” one analyst quoted in a Bloomberg News report, suggested. They’re doing a good job of balancing income and expenses and paring debt in a tough economy, he said, “but I don’t think this is a year when someone is going to buy a TV and a tablet and a new smartphone and go to Disneyland.” Translation: Don’t expect stellar holiday sales reports from retailers this year.

No Help from Housing

Also don’t expect the housing market to do much to boost the economy any time soon. Existing home sales increased to a five-month high in August, and new home sales also rose year-over-year, although they declined 2.3 percent below the July total. But analysts cautioned against reading too much positive news in those reports. At best, the sales figures indicate that the market isn’t getting any worse, largely, because it can’t, Sean Incremona, a senior economist at 4Cast Inc., told reporters. The small gain in existing home sales is “by no means a sign that the housing market is doing well,” he insisted.

Analysts also dumped cold water on the reduction in the inventory of new homes available for sale, resulting, they said, because builders are constructing fewer homes, not because they are selling more of them.

“Sales are very weak, and there will be very little improvement over the next couple of months,” Ceila Chen, a housing economist at Moody’s Analytics Inc., told Bloomberg. The 3 percent increase in building permits recorded in August “might be a sign that there’s hope,” she acknowledged, but with distressed home sales continuing to pressure home prices she predicts, “It will be a very slow return to normal.”