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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Because this update covers the economy and not the presidential campaign, the big news for this month is the November unemployment rate, which fell “unexpectedly” from 9.1 percent to 8.6 percent. It is worth nothing that an increasing number of economic reports have been labeled “unexpected or “better than expected,” but more of that later.

The Labor Department’s employment report drew quiet applause from analysts who have been insisting that the economic outlook is better than the consensus “recession-risks-are-rising” view suggests, while holders of that consensus view hastened to explain why the improvement was less encouraging than it might seem to be.

While the decline in the unemployment rate is welcome, these analysts suggest, it came in part because many discouraged workers abandoned hope of finding jobs and so weren’t counted among the unemployed. And the addition of 120,000 private sector jobs, while also welcome, was still well below the sustained pace (at least 250,000 new jobs per month) required to reduce the unemployment rate to its pre-recession level of 6 percent.

“When the unemployment rate declines, we want to see both employment and participation increase as discouraged workers return to the labor force,” Neil Dutta, an economist at Bank of America Corp., wrote in a recent note to clients. “Today, we got the former,” he said, “but not the latter, making the 0.4 percentage point drop look a bit suspect. We would not be surprised to see the unemployment rate give back some of its decline in coming months.”

Encouraging Number

The employment report may not have included everything Dutta and other economists wanted to see, but it still contained some encouraging data:

  • Both the September and October employment calculations were revised upward, adding 72,000 jobs to the previously reported totals.
  • The Labor Department’s “Household Survey” posted a gain of 278,000 jobs for November, the third consecutive surge in this report, which, though less accurate than the business survey on which the unemployment report is based, is generally viewed as a better indicator of future employment trends.

Another month of gains after this one “could be considered a trend,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, wrote in a note to clients, indicating, he said, that “the labor market might be stronger than the payrolls tally suggests.”

Housing: Marginal Improvement

The unemployment rate wasn’t the only “better than expected” result reported in November. That modifier also cropped up in housing market reports, which haven’t produced much good news, if any, in the last two years. But existing home sales increased “unexpectedly” by 1.4 percent in October to an annual rate of nearly 5 million units, nearly 13.5 percent above the October, 2010 level – a dismally low benchmark, but an upward move nonetheless.

Pending sales – an indicator of future activity – also increased by 10.4 percent, the largest gain in this National Association of Realtors index since November of last year, and another much better performance than most analysts had predicted.

New home sales increased, rising only marginally above an historically low level. Home starts held almost even in September (good news compared with predictions of another steep decline) while building permits jumped by nearly 18 percent, with both the single-family and multi-family sectors reporting gains. The 5.1 percent increase in single-family permits pushed them to the highest level recorded this year. The index of homebuilder optimism also increased to 20 – hardly a dancing-on-the-tables number, but the best reading in nearly two years.

The November data provide “supporting evidence that the single-family market is finally getting off the mat,” Patrick Newport, U.S. economist at HIS Global Insight, told Builder on Line.

“Still at the bottom, but gently beginning to move up in the right direction,” is how Eric Green, chief market economist at TD Securities Inc. described the latest housing statistics. But he also cautioned against expecting any major improvement in housing any time soon. “It may be late 2012 before we reach the point that housing construction is going to contribute meaningfully to growth,” he told Bloomberg News.

Inventory levels have declined for both new and existing homes—reaching the lowest level in four years for existing homes in October — and the percentage of homeowners with negative equity also declined a little, to 22.1 percent, still high, but at least no longer increasing.

Foreclosure rates increased in the third quarter — a positive indicator that lenders are beginning to clear the backlog created by procedural delays resulting from the robo-signing mess, but portending a not-so-positive increase in the “shadow inventory” of homes that will be entering the foreclosure pipeline, adding to the backlog of unsold homes and putting more downward pressure on home prices, which have begun to wobble again.

Home Prices: Drifting Down

The closely-watched Standard & Poor’s-Case Shiller index of home prices in major metropolitan areas declined more steeply than expected in September, adding a 3.56 percent drop to the 3.5 percent loss recorded in August. But the year-over-year decline for September was the smallest in the past seven months.

The downward drift in most cities was “discouraging,” David Blitzer, chairman of the S&P index committee, acknowledged in a press statement, but “the plunging collapse of prices seen in 2007-2009 seems to be behind us. A “sustained recovery,” he added, “will probably need a stronger economy.”

Economy: Looking Better

Some recent reports seem to be pointing noticeably, if not dramatically, in that direction.

The Commerce Department reported that gross domestic product (GDP) increased more slowly than originally estimated in the third quarter – 2 percent vs. 2.5 percent ―which would not ordinarily count as good news. But the reduction was triggered by a decline in inventory levels, which suggests that the growth rate is likely to be stronger in the final quarter of this year.

The Conference Board’s Index of Leading Economic Indicators increased by nearly 1 percent in October ― another “better than expected” performance and the largest jump in this index since February.

Factory output also increased in September, posting its largest gain in the past three months and accounting for most of the 0.7 percent manufacturing increase reported by the Federal Reserve.

Manufacturers reported nearly $33 billion in new orders for machinery equipment in September, the largest total they have booked since July 2008.

Retail sales increased by 0.5 percent in October, boosted by purchases of electronics equipment, which reached the highest level in the past two years. Record in-store and on-line purchases on “Black Friday”, the day after Thanksgiving, have also led at least some analysts to conclude that the crucial holiday season may be better than they have been predicting.

The Conference Board’s Consumer Confidence Index and the Thomson-Reuters/University of Michigan’s confidence gauge, which have been pointing in opposite directions much of this year, both posted gains in November. The Conference Board reading soared to 56 compared with 40.9 in November, as consumers’ perceptions of current conditions and expectations for the next six months both improved.

Consumer spending increased at an annualized rate of 2.4 percent in the third quarter, the most robust reading so far this year, according to a Federal Reserve report, despite a decline in consumer income. Some economists note that recent spending gains have come at the expense of consumer savings, which declined in September – a trend that, these analysts contend, is not sustainable. Others point out that the savings rate tends to be something of a moving target, adjusted frequently because of its volatility. They attribute the spending gains to more sustainable factors, such as low inflation, increasing consumer confidence, and low interest rates.

European Cloud

Despite the accumulation of strong or strengthening economic reports, some economists think the risks of another recession are still rising, largely because of the fallout from the deepening debt crisis in Europe.

“Deteriorating fiscal realities [in Europe] are keeping many a trader awake at night, reliving the nightmare of the near-collapse of financial markets in the wake of the Lehman Brothers bankruptcy,” researchers at the Federal Reserve Bank of San Francisco warn in a recently published paper. “Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic,” the authors note. “However, if we navigate the storm though the second half of 2012,” they add, “it appears that danger will recede rapidly in 2013.” We just have to get from here to there.