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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“Everyone can relax.”  That conclusion from a Wall Street Journal report, reflected the consensus exhale accompanying the March employment report.  Employers added 196,000 jobs for the month, beating analysts’ expectations and pretty much erasing the fears stirred by February’s stunningly anemic   20,000 gain. That total was revised upward to 33,000,  The statistical adjustments also added another 1,000 jobs to the robust January total, boosting it to 312,000. 

Average hourly earnings continued to increase, but at a slower pace – 3.2 percent year-over-year in March compared with 3.4 percent in February – still the fastest growth rate in a decade.  The unemployment rate remained unchanged at 3.8 percent. 

Surprising just about everyone, the Federal Reserve (Fed) left interest rates unchanged in March and, more surprising still, indicated that there probably won’t be any additional rate hikes this year, with only one increase likely in 2020. 

Opting to extend the “patience” that kept rates unchanged in January, the Fed’s policy-making Federal Open Market Committee (FOMC) voted unanimously to alter a policy course that, until recently, had been pointing firmly in the direction of multiple rate hikes this year. 

It's "a great time to be patient," Fed Chairman Jerome Powell told reporters at a press conference following the FOMC meeting.

No Clear Signal

With inflationary pressures subdued and economic growth showing signs of slowing worldwide, policy makers also decided to slow the pace at which they have been slimming the Fed’s investment portfolio.  In comments to reporters, Fed Chairman Jerome Powell emphasized that the Central Bank will take its direction from key financial and economic indicators.  “But data we’re seeing are not currently sending a signal,” Powell said.  “When they do clarify, we will act appropriately.” 

The FOMC meeting came before the strong March employment report, but Powell’s dovish comments suggested that the study labor market isn’t likely to trigger a more aggressive rate policy, at least not any time soon. 

As the employment picture improved steadily last year, the Fed had been concerned that outsized job and wage would ignite inflationary pressures.  But it appears that Fed policy makers are now more concerned that a stubbornly low inflation rate, which remains stuck below the Fed’s 2 percent target, is a more worrisome indicator of economic weakness.

Given that concern, “It may be some time before the outlook for jobs and inflation calls clearly for a change in [interest rate] policy,” Powell told reporters. After the FOMC meeting.  “I don’t feel we have convincingly achieved our two percent [inflation] mandate in a symmetrical way,” he added. “It’s one of the major challenges of our time, to have downward pressure on inflation” globally.

Underlying Strength – Overlaying Concerns

Although Fed officials continue to emphasize the underlying strength of the economy, the current rate policy “paints a distinctly less rosy picture,” Joseph Lawler, head of  research at London Capital Group, told Business Insider. 

Some current indicators underscore that concern.  Economic growth slowed to 2.2 percent in the fourth quarter, short of expectations and below the third quarter rate of 3.4 percent.  Consumer confidence, meanwhile, either rose or fell, depending on which indicator you choose.  The University of Michigan index rose to 97.8 in March from 93.8 in February, rebounding smartly from 91.2 in January, which was the lowest mark in nearly three years. 

Moving in the opposite direction, the Conference Board index fell to 124.1 from 131.4 in February, driven down primarily by darkening views of current business and labor market conditions.  The March employment report may brighten the labor market expectations. 

Interest Rate Boost

Mortgage rates, following a downward trend since the beginning of the year, provided wind beneath the housing market’s wings in February.  Existing homes sales increased by nearly 12 percent compared with January – the largest month-over-month increase since December of 2015. New single-family sales hit an 11-month high, while January’s dismal sales were revised a bit higher. 

Lawrence Yun, chief economist for the National Association of Realtors (NAR) credited "a powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence” with driving the rebound, reversing several months of declining sales

Slower appreciation rates also helped (January’s negligible 0.2 percent annual increase in the closely-watched CoreLogic Case-Shiller home price index was the smallest since 2012), combining with lower mortgage rates to ease affordability concerns that have sidelined many prospective buyers. While those favorable financial trends will motivate buyers, analysts agree, they won’t create homes for them to buy. 

And inventory levels, despite some improvements, remain ”stubbornly low” in most markets, Sam Khater, Freddie Mac’s chief economist, observed in a recent report.  Pending home sales declined by nearly 5 percent in February, the 14th consecutive monthly year-over-year decline, indicating, analysts agree, that demand for housing continues to outpace the supply.

“Significant construction of moderately priced-homes is still needed,"  the NAR’s Yun agrees. That goal also remains elusive.  Single-family housing starts om February  fell nearly 17 percent below the January level to an annual rate of 805,000 units – the lowest in more than 18 months.  Rising lumber costs and shortages of land and labor continue to impede builder efforts to boost construction, analysis say.

Upbeat Builders

Given those challenges, builders are more upbeat than you might expect.  The National Association of Home Builders (NAHB) confidence index held at 62 in March, following two previous monthly increases, buoyed, analysts say, by the expectation that continued employment growth and wage gains will spur home sales this spring. 

Consecutive monthly increases in construction spending – up 2.5 percent in January and another 1 percent in February – suggests that builders may be putting their money where their optimism is.   support for that view. 

“The numbers are clearly better than expected, and they included fantastic upward revisions to January,” Christopher Low, chief economist with FTN Financial in New York, told HousingWire. “For builders to come back like this [after the weakness that prevailed at the end of last year], they must be optimistic for a reason,” he added.  “They must sense stronger demand.”