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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Layoffs are declining, the employment numbers look better, tight credit is getting looser, retail spending forecasts are becoming more optimistic and the service sector shows signs of strengthening. In fact, many indicators suggest the economy is improving – but not fast enough to reduce the unemployment rate nor dramatically enough to lift an increasingly downbeat consumer mood.

Among the many positive – or somewhat positive – October reports:

  • Employers increased their payrolls more than expected, adding 151,000 workers for the month, while the Labor Department indicated that September’s job loss was smaller than originally reported.
  • The credit freeze showed signs of thawing, as banks increased their lending activity in July, August, and September – the first consecutive lending gains in two years. While the increase in credit availability fell considerably short of overwhelming, at least “lending is no longer collapsing,” Neal Soss, chief economist at Credit Suisse told Business Week.
  • The service sector gained more ground than expected, expanding at its fastest pace in the past three months. The manufacturing sector also showed continuing strength, indicating to some analysts that the recovery remains on track and is poised to gain momentum in this year’s final quarter.

October Surprise

The surprising October payroll report was particularly welcome, but it was also tempered by less positive employment data, in particular – an unexpected weekly increase in unemployment claims and statistics indicating that the current “participation rate” (the percentage of adults working or seeking employment) fell to its lowest level in 26 years.

“All in all, the payrolls report was encouraging news, especially for those who got one of the 151,000 jobs,” Rex Nutting, a columnist for Market Watch wrote. “But this economy and this nation are still struggling,” he added.

Consumers, apparently, are focusing less on the encouragement than on the struggle. The key consumer confidence surveys pointed in opposite directions in October – the Conference Board up a little, the Thomson/Reuters survey down a little. Although the gauge of expectations for the next six months rose in both surveys, the view of the current job market was dismal. “Confidence is still very depressed,” Ryan Sweet a senior economist at Moody’s Analytics Inc., told Bloomberg News. “For any, it’s still going to feel like a recession until employment comes back.”

Recovery in the Air?

Despite their uncertainty about the employment outlook, consumers increased their spending in the third quarter, fueling an unexpected increase in economic growth. Although spending trailed off in September, as consumer income declined for the first time in the past 14 months, retail sales increased, leading the National Retail Federation to boost its estimates for holiday spending. “The markets can smell a recovery is coming,” James Paulsen, chief investment strategist for Wells Capital Management asserted in a Bloomberg interview.

Surveys of corporate executives similarly reflect something of a disconnect between what people are saying about the economic outlook and what they are doing or planning to do. Confidence levels for chief executive officers fell to the lowest level in the past 18 months in a Conference Board Survey. Consistent with that view, Moody’s Investors Service estimates that companies have socked away nearly $1 trillion in cash, mirroring the increase in consumer savings rates over the past year.

“It would be naïve to believe that the human side of running a business is insulated from the low confidence that consumers have, John Milne, an asset manager, told Bloomberg.

But 31 percent of those nervous executives also said they are planning to increase hiring over the next six months, compared with only 17 percent in the last survey. And a separate survey by the National Association for Business Economics found that more companies are planning to increase spending on new equipment in the next year.

No Relief in Housing

If you’re looking for less ambiguity, you can find it in the housing market reports, but the picture isn’t particularly bright. Although new home sales increased by 6.6 percent in September, the sales pace remains weak and close to a record low. Existing home sales also increased (by 10 percent), but remained near the lowest levels in the past decade. Pending sales and building permits, forward indicators for existing and new home sales, respectively, both declined, and home prices continue to fall.

The Standard & Poor’s/Case-Shiller 20-city index fell by 2 percent in August, as 15 of the cities reported declines, leaving the index nearly 28 percent below its July 2006 peak and leading Karl Case, a co-founder of the index, to conclude, “The recovery that started in 2009 has petered out.” Some analysts are predicting that prices will fall another 8 percent to 10 percent before hitting bottom; housing industry analyst Gary Shilling thinks a 20 percent decline is possible, given the large, foreclosure-driven inventory of unsold homes.

Moody’s Mark Zandi is somewhat less pessimistic. Although he agrees that prices have further to fall, he is confident there will be “no vicious self-reinforcing spiral down.” And he sees a definite ray of light at the end of this tunnel. As the employment picture begins to brighten, he predicts, the housing market will rebound as consumers recognize that home prices are more affordable than they have been in the past decade.

The question, of course, is when that turning point will come – for the housing market and the economy.