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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A psychologist graphing the stock market’s performance of late might diagnose manic-depressive disorder, or the behavior of a particularly moody teenager — up one day, down the next, catapulted instantly (and often with little provocation) into euphoria and then dragged back into deep depression, responding with equal intensity to political and economic hiccoughs large and small, real and imagined, anticipated and feared.

The most recent emotional triggers were provided by the unfolding drama overseas, as European leaders have grappled with the Greek debt crisis – as of this writing, close to resolution or not, depending on which reports you were readying on what day, and on how broadly or narrowly you defined “solution.”

Painful Forecast

Closer to home, the economic reports were mixed, as usual. The risks of a double-dip recession seem to have receded, but the forecast for painfully, staggeringly slow growth and persistent high unemployment for at least the next year is hardly uplifting.

The Federal Reserve has pronounced itself to be disappointed and concerned about the “frustratingly slow” recovery pace, willing to take further action, if needed – but not yet. “I think it would be helpful if we could get assistance from other parts of government to help create more jobs,” Fed Chairman Ben Bernanke told reporters at a press conference in early November.

With Congressional leaders focused on slashing the deficit (and campaigning for re-election), it is difficult to imagine what “other parts of government” might provide that assistance – or when.

The most recent employment report underscores the need for help from somewhere. Employers added only 80,000 jobs in October – fewer than anticipated and far fewer than needed to make a serious dent in the unemployment rate, which, nonetheless, fell to 9 percent from 9.1 percent, as the initial reports for employment growth in August and September were both revised sharply upward. Economists say the economy would have to generate about 150,000 jobs per month for a year to reduce the unemployment rate by half-a-percentage-point.

Dean Baker, at the Center for Economic and Policy Research, offers an even grimmer calculation: “At [the current] pace, it would take more than 33 years to return to the pre-recession rates of unemployment.”

Still, Baker was able to find some positive indicators in the employment data: The “employment-to-population ratio” increased slightly – not a lot, but “a turn in the right direction,” and the unemployment rates for Blacks and Hispanics – hit hardest by the downturn – also declined, as did the percentage of long-term unemployed workers – down to 42.4 percent from 44.6 percent. Baker also noted an increase in the percentage of unemployed workers who had quit voluntarily, which, he said, “could be a sign of increased confidence in the labor market – but it may also just be erratic movement in the data.”

Positives in Pastel

Other economic reports provide less ambiguous positive trends – painted more in pastels than bright colors, to be sure, but positive nonetheless:

The economy grew at a 2.5 percent annual rate in the third quarter – nearly double the 1.3 percent growth rate in the second quarter and the fastest pace in a year, prompting Neal Soss, chief economist with Credit Suisse to proclaim: “The American economy has finally accomplished the recovery and has now entered the expansion.” But he was also quick to add: “Growth is clearly too slow to solve the most significant problems the economy faces – jobs and getting public budgets under control.” Ben Herzon, an economist at Macroeconomic Advisers in St. Louis agreed. “The time to get excited,” he told Bloomberg News, “is when everyone who is looking for work has got work.”

U.S. corporations have been reporting strong third quarter profits, beating analysts’ projections by an average of 5.5 percent.

Corporate spending on equipment and software jumped by 17.4 percent, adding more than a percentage point to the third quarter growth rate.

The manufacturing sector rebounded from its springtime swoon, growing at a 4.3 percent annualized rate in the third quarter, according to a Commerce Department report. The Institute for Supply Management’s factory index fell to 50.8 from 51.6 in September – reversing an August-to-September gain, and the group’s business barometer also declined a bit – to 58.4 from 60.4 in September. But the employment component of that index climbed to a six-month high.

The Index of Leading Economic Indicators posted its fifth consecutive gain In September – but the 0.2 percent increase was the weakest in three months, reflecting “excruciatingly slow” economic growth, according to the Conference Board report.

Retail sales, on the other hand, grew at the fastest pace in the past seven months, largely on the strength of automobile purchases, deflecting concern that depressed and income-strained consumers would turn a tepid recovery ice cold.

A “Fragile” Environment

Consumers may have spent more than expected in October, but they didn’t do it based on income gains. After-tax income adjusted for inflation actually declined at a 1.7 percent annual pace in October – the biggest drop since the third quarter of 2009. Consumers financed their October purchases largely by dipping into savings, pushing the saving rate down by 4.1 percent and suggesting to many economists that the current spending pace isn’t sustainable.

“The environment out there is still fragile,” James Skinner, vice chairman and chief executive officer of McDonald’s told analysts in a recent conference call. “Consumers everywhere continue to be cautious and hesitant to spend.”

Consumer confidence also remains fragile – at best – varying, apparently based on when the survey questions are posed. The Thomson Reuters/University of Michigan index of consumer sentiment increased to 60.9 in October, building on a larger jump, from 57.5 to 59.4 in September. But the Conference Board’s sentiment index, published a few days earlier, slumped to 39.8 from 46.4 the previous month, the lowest reading since March of 2009. The measure of current conditions and the outlook for the next six months both tanked, as did expectations for future employment and income gains. “This is not good for the holidays,” Yelena Shulyatyeva, an economist at BNP Paribas, observed. The critical holiday shopping season “won’t be horrible,” she told Bloomberg. “But it will definitely be worse than last year.”

Housing Still Struggling

Some analysts are making the same prediction about the housing market, which continued to defy expectations that it can’t get any worse. Existing and new home sales are both poised to set new records for weak performance this year as the housing market struggles to gain a toehold in an economic recovery that, as yet, won’t support it.

Existing home sales fell by 3.6 percent in September and the index of pending sales fell by 4.6 percent, suggesting that the future sales reports aren’t likely to improve any time soon. New single-family home sales increased by 5.7 percent in September – this sector’s strongest performance since March – but prices declined as builders continue to struggle to compete with a large inventory of existing homes and foreclosure sales that are depressing prices across-the-board.

The S&P/Case Shiller 20-city index of property values fell by 3.8 percent in September compared with August, but in the year-over-year comparisons (a more accurate barometer of market trends, analysts say), 16 cities reported gains, providing “a modest glimmer of hope,” David Blitzer, chairman of the SYP index committee, said in a press statement.

That glimmer is still too dim for many analysts, who predict that prices still have further to fall before finding a bottom solid enough to end the downward spiral. Fiserv predicts that prices will fall another 3.6 percent by next June, leaving them 35 percent below the 2006 peak; Zillow real Estate’s chief economist, Stan Humphries, thinks it will be next year “at the earliest” before the market hits bottom. High unemployment and negative equity will continue to create stiff headwinds in the interim, Humphries said in a recent market report.

Declining home prices pose “a serious impediment to a stronger economic recovery,” William Dudley, president of the Federal Reserve Bank of New York, agrees. Speaking recently at Fordham University, Dudley warned that “continued house price declines could lead to even more defaults, foreclosures and distress sales, undermining wealth, confidence and spending. Breaking this vicious cycle,” he said, “is one of the most pressing issues facing policy makers.”