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 unemployment rate increased to 9.9 percent in April, and that represents good news for the economy. Good news? Well, yes, actually, counterintuitive though that seems. The increase from 9.7 percent in March indicates that workers who had previously given up on finding jobs have re-entered the market, encouraged by reports that employers are beginning to hire again. And that appears to be the case.

The Department of Labor’s employment report included another unambiguously positive statistic: Employers added 231,000 workers to their payrolls last month, and most of them (156,000) were in the private sector, not temporary workers hired to collect census data, as some analysis had feared.

The Labor Department’s Household Survey, deemed an even more reliable employment indicator, was even more positive, indicating that 550,000 workers found jobs in April for a net increase of 1.67 million jobs in the first four months of the year, compared to the 523,000 reflected in payroll survey.

“Clearly, companies have a newfound confidence in the future of the economic recovery and on the part of their own business prospects," Joel Naroff, president of Naroff Economic Advisors., told Bloomberg News. "The broad-based job gains are an indication that businesses are feeling more comfortable about expanding their work forces," he added.

Feeling Better

Some analysts caution that it will take much more robust hiring growth over several quarters to begin to make a serious dent in the unemployment rate, but even with that caveat, economists are becoming more confident about the strength and sustainability of the recovery. USA Today’s quarterly survey of 46 leading economists found most of them (7/10) more optimistic than they were three months ago. Although few are predicting a muscular V-shaped recovery, the consensus is now pointing much more toward a moderate U-shaped rebound, and much less toward the double-dip downturn many were predicting earlier this year. The odds of that double-dip have fallen from 25 percent to 15 percent, according to Mark Zandi, chief economist at Moody’s Economy.com.

That confidence is not shared by the National Bureau of Economic Research, which has declined, thus far, to declare an official end to the recession, concluding that it is still “premature” to do so. The Federal Reserve also remains cautious. While acknowledging signs that the economy is recovering, the Federal Open Market Committee decided in at its April meeting that the “down side risks” still justify holding the target Fed funds rate at its current range (0 to 0.25 percent) “for an extended period.”

Still, as Fed policy makers indicated, the positive data continue to mount. A few examples:

The U.S. Index of Leading indicators increased by 1.4 percent in March, the biggest gain in 10 months, with 7 of 10 indicators pointing upward.
The Institute of Supply Management’s index of non-manufacturing business, a measure of the service sector, remained solidly in positive territory in April, at 55.4, maintaining a four-year high for a second month.

Orders for durable goods (excluding autos and aircraft) increased by 2.8 percent – the largest increase in this index since the beginning of the recession. Demand for computers and electrical equipment reflected the largest gain in a year.

Corporate spending is beginning to increase. Nearly half (47 percent) of the executives responding to a Business Roundtable Survey, said they expect to spend more during the next six months; many of them have apparently begun to do so. Business spending on new equipment increased at a 13 percent annual rate in the fourth quarter of last year following a 19 percent gain in the third quarter. “The clouds are breaking and the forecast ahead of us is promising,” Jeffrey Immelt, chief executive officer of General Electric, told shareholders at the company’s annual meeting last month.

Consumers are also beginning to loosen the death grip on their wallets. Consumer spending increased at a 3.6 percent annual rate in the first quarter of this year, boosting retail sales by a 10.1 percent annual rate (the strongest showing for that sector in four years). The spending rate wasn’t explosive, by past post-recession standards, but it was strong enough to fuel a 3.2 percent annual increase in the nation’s GDP for the first quarter, following the strong 5.6 percent fourth quarter pace. The back-to-back positive growth numbers represent the economy’s best performance since the second half of 2003.
Consumer Ambivalence

Despite the accumulating positive data, consumers remain ambivalent about the signs of economic recovery. The Conference Board’s Consumer Confidence Index rose to 57.9 in April, soaring past the downwardly revised 52.3 reading for March and handily beating the consensus forecast of 53.5. But, as has been the case for much of the past year, the University of Michigan’s Consumer Sentiment Index moved in the opposite direction, falling to 72.2 from 73.6, as consumers responding to that survey reported continuing concern about the economic outlook generally and the employment picture in particular. In the Conference Board survey, by contrast, respondents were more optimistic about the job forecast and more confident about the prospects for economic growth over the next six months.

Small business executives line up on the “continuing concerns” side of this divide. The National Federation of Independent Business’ confidence index fell to 86.8 in March from 88 in February, the lowest level since July of last year, as 7 of 10 index components slipped. “The March reading is very low and headed in the wrong direction, very inconsistent with the notion that the economy is recovering and that job growth has strength,” William Dunkelberg, chief economist for the business group, told Bloomberg News. The confidence reading suggests, he said, that “uncertainty must still prevail, overwhelming any good news about the economy.”

Uncertain Housing Market

“Uncertainty” also describes the mood suggested by recent housing market data, as analysts debate the extent to which recent gains in the sales of new and existing homes are attributable to the homeowner’s tax credit, and thus likely to reverse direction with the end of that program.

Reflecting the scramble to grab the credit before the April 30 deadline, pending sales increased by 5.3 percent in March, pushing this National Association of Realtors (NAR) index up from 97.7 in February to 102.9 in March -- 21.1 percent above the year-ago level. Existing home sales increased by 6.8 percent in March to a seasonally adjusted annual rate of 5.35 million units -- 16.1 percent above the March, 2009 figure, beating the low-end projection of 5.05 million and falling just below the high-end forecast of a 5.5 million unit annual sales rate.

New home sales also increased in March --they actually soared -- by 27 percent to an annual pace of 411,000 units, registering the strongest performance since July and blowing past both the record low of 324,000 in February and forecasts ranging from 300,000 to 362,000, according to a Bloomberg News survey of economists. Builder confidence, measured by a National Association of Home Builders index, climbed along with sales, reaching the highest level in more than a year. Reflecting that growing confidence, new home starts and building permits (a gauge of future construction) both rose to their highest level in more than a year.

Increased home buying activity has reduced housing inventories – but not very much; the supply of unsold homes declined to 8 months in March, down from 8.5 months in February. “Although foreclosures continue to expand the pool of unsold homes, “[they] are being absorbed manageably,” Lawrence Yun, the NAR’s chief economist, said in a press statement. “In fact,” he added, “foreclosures are selling quickly, especially in the lower price ranges that are attractive to first-time home buyers.”

Mortgage delinquency rates have declined slightly, which is encouraging, but the foreclosure rate remains stubbornly high, which is not encouraging at all. Bank foreclosure actions increased by 35 percent in the first quarter compared with a year ago as the number of households facing foreclosure actions increased by 16 percent, according to RealtyTrac, which is predicting that foreclosures could reach the 1 million mark this year.

Negative Equity Fears

The key problem, most analysts agree, is negative equity. More than 11 million homeowners -- an estimated one quarter of all mortgage borrowers ¾ have loans that exceed the current value of their homes, according to some reports. With home prices recovering slowly in most areas and not at all in some markets, analysts are warning that “strategic defaults” will increase, as more borrowers capable of making their mortgage payments decide it is not in their financial interests to continue doing so.

A recent study by economists at the University of Chicago estimated that 31 percent of the foreclosures in March were strategic compared with 21 percent a year ago. The study estimates that the likelihood borrowers will walk away from their homes increases by 23 percent if a neighbor defaults strategically and rises by nearly 30 percent if the owners are able to obtain financing to purchase another home. A staggering 56 percent of homeowners surveyed for this study said they do not think lenders will come after them if they walk away.

Another study sponsored by Morgan Stanley found that “strategic defaulters” on the whole have higher credit scores, larger loan balances and more recent mortgages” than borrowers who decide to stick with their underwater loans. Paola Sapienza, a finance professor at Northwestern University’s Kellogg School of management, and a co-author of this study, concluded that it makes economic sense for borrowers who are more than 25 percent under water on their homes to consider walking way.