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 Federal Reserve is signaling that a December rate hike is almost certain. As widely expected, the Federal Open Market Committee (FOMC) left rates unchanged at its November meeting, reflecting somewhat more concern than the FBI about interfering in the impending election. But the committee’s post-meeting statement indicated that Fed officials see the moon, and sun, and stars aligning nicely to justify the long-awaited increase in the Fed’s benchmark rate, which has remained unchanged since last December.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of further progress toward its objectives.”

The statement is almost identical to the one issued after the October meeting, except for the addition of one word – “some” to describe the evidence Fed officials want to see. That word speaks volumes, according to Fed watchers, who parse every syllable of Fed pronouncements. “[It] suggests they don’t need to see much more [evidence] to raise rates,” a Wall Street Journal analysis noted.

Also notable by its absence in the November statement was the Fed’s expectation that inflation will “remain low in the near term” – language that was included in the previous three FOMC statements.

Recent economic reports have indicated that inflation pressures have begun to increase modestly – moving slowly toward the Fed’s 2 percent target, as the third quarter growth rate hit nearly 3 percent, rebounding from slightly better than 1 percent in the second quarter. Predictions of a strong rebound in the third quarter growth rate (projected at 3.1 percent) provided additional evidence of underlying economic strength.

Although reflecting growing confidence in the economy, the FOMC statement does create enough “wiggle room” to allow the Fed to stand pat “should economic and financial conditions change” after the election, Luke Bartholomew, an analyst at Aberdeen Asset Management, told the Wall Street Journal,.

Although it fell somewhat shore of expectations, the October employment report also affirmed the consensus view that a December rate hike is likely. Employers added 161,000 workers to their payrolls (the median forecast called for more than 170,000), but an upward adjustment in the September report added 30,000 jobs to that month’s total. The unemployment rate dipped slightly (from 5 percent in September to 4.9 percent), and the labor participation rate slipped to 62.8 percent from 62.9 percent, reflecting a small decline in the number of working-age people who are either employed or actively looking for work.

The most encouraging news came on the income side: Hourly earnings increased to positive news was the increase in average hourly earnings, which rose to$25.92 – up 0.4 percent compared with September and up nearly 3 percent for the year-to-date. That represents the fastest pace since the financial crisis struck.

“As the job market gets tighter, firms are responding to tougher competition for workers by raising pay. This is a big positive for income growth, consumer spending, and the overall economy,” Stuart Hoffman, an economist at PNC Financial Services, told the Wall Street Journal.

“The trend in wage growth is rising,” Ian Shepherdson, an economist at Pantheon Macroeconomics, agreed. He expects that upward trend to continue next year “as the drag from low headline and core inflation fades and people seek bigger nominal [wage] increases…With the labor market very tight,” Sheperdson says, “employers will struggle to resist’ that pressure.

Consumer spending and consumer confidence moved in opposite directions. Spending, which accounts for nearly 70 percent of U.S. economic activity, increased more than expected in September after slipping in August, but confidence levels fell in October, from the post-recession high of 103.5 measured in September, to 88.6. Consumers’ views of current conditions and their expectations for the future both soured.

Confidence in the housing market also dipped in October, as Fannie Mae’s Home Purchase Sentiment Index posted its third consecutive month-over-month decline, falling to its lowest level since March.

“Recent erosion in sentiment likely reflects, in part, enhanced uncertainty facing consumers today,” Doug Duncan, Fannie’s chief economist, suggested.

That downward trend wasn’t reflected in new home sales, which reached an annual level of 593,000 in September – 3.1 percent above the August level and nearly 30 percent higher than the same month last year.

Existing-home sales also rebounded strongly in September, as first-time home buyers pushed sales totals to an annual rate of 5.47 million units – 0.6 percent above the year-ago level. Pending home sales also increased by 1.5 percent in September after falling by 2.4 percent in August.

Prices continued on their upward trajectory as “painfully low” inventories continued to limit buyer choices. "Inventory has been extremely tight all year and is unlikely to improve now that the seasonal decline in listings is about to kick in," Lawrence Yun, the NAR’s chief economist said. "Unfortunately, there won't be much relief from new home construction, which continues to be grossly inadequate in relation to demand."

He is somewhat more optimistic about the prospects for next year, however, largely because he thinks “leading edge” millennial households that have been sitting on the sidelines, will begin to enter the market.

“NAR surveys from both current renters and recent buyers prove that there’s an overwhelmingly strong desire among the younger generation to own a home of their own,” Yun noted, and he expects demand from that group to give the housing market “a big lift” over the next two years. But that lift will come, he cautioned, only if “there’s enough new and existing supply at entry-level prices for them to reach the market. That’s why it’s absolutely imperative that homebuilders ramp up the production of more single-family homes to meet demand and slow price growth,” he added.