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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Analysts reached for superlatives – “blowout” and “blockbuster” among them ─ to describe November’s surprisingly strong employment report.  Employers added 266,000 workers to their payrolls, blowing well past the 187,000 economists had predicted.  October’s anemic 128,000 gain was revised upward slightly, to 156,000, and the unemployment rate remained unchanged at 3.5 percent.  Average hourly earnings increased by 7 cents – a 3.1 percent year-over-year gain.

The surprisingly strong Department of Labor report followed two consecutive months of disappointing gains, forcing analysts to revise their conclusion that the employment market was slowing. 

“The whole tenor has changed in terms of job growth,” Stephen Stanley, chief economist at Amherst Pierpont told  Bloomberg News. “We’re back at steady-as-she-goes at a robust pace.”

The November labor report – the last one for this year – figures prominently in many of the economic forecasts for 2020, a sampling of which we’ve compiled for you here. They come with our best wishes for the holidays and the New Year, and with this reminder from an unknown source, about the shortcomings of economic forecasts:  “Forecasting is the art of saying what will happen and then explaining why it didn’t.”

FEDERAL RESERVE POLICY

After increasing rates four times in 2018 because of concern the economy was overheating, the Fed has slashed rates three times this year on concerns that growth was stalling. The strong employment report reduces the likelihood of additional rate cuts, many analysts agree – but some see room for additional cuts next year to keep the economic recovery going.       

Ward McCarthy, chief financial economist at Jefferies.  “The bottom line is the labor market is cooking. It clearly says the Fed should not do anything more. The Fed can now sit back on the shelf, not have to worry about having to be pestered about lower rates.”

Douglas Duncan, chief economist for Fannie Mae.   “We continue to expect the Fed to cut interest rates only one more time in the foreseeable future, in early 2020, as a hedge against the sizeable downside risks and to counteract muted inflation.”

Seth Carpenter, UBS economist.  “We believe that [slow] growth in the first half of the year will compel the [Fed] to cut. “Indeed, with our Q4 forecast for GDP growth at 1.2%, we think some apprehension will start to rise even this year, but we expect them to hold off cutting until early next year.”

Joe LaVorgna, chief Americas economist at Natixis.  “Unless the yield curve steepens further, monetary policymakers will need to lower interest rates again sometime early next year.”

Jerome Powell, chairman of the Federal Reserve.  “Monetary policy is now well positioned to support a strong labor market and return inflation decisively to [the Fed’s 2% target]….If the outlook changes materially, policy will change as well.”

ECONOMIC GROWTH

Douglas Duncan, chief economist for Fannie Mae.  “Even as global uncertainties mount, we continue to expect the domestic economy to produce solid, if not spectacular, growth,”

Justin Lahart, Wall Street Journal. “ If heightened trade worries lead [the Fed] to lower rates more, investors might become legitimately concerned that it is running out of ammunition. Throw in uncertainties surrounding the presidential election hitting in the latter part of the year, and 2020 could be anything but easy.”

Goldman Sachs economists.  The U.S. China trade war will  ease and  consumer spending will remain strong, propelling continued growth and job gains. "A year of above-trend growth should mean another year of solid job creation,"  and a reduction in recession risks.  "The current expansion is now the longest in US business cycle records dating to the 1850s, and some recession fears may simply reflect an instinctive sense that its time is nearly up….This has not been an unreasonable thought historically, as the two usual late-cycle risks-inflationary overheating and financial imbalances-often did grow over time. But so far both risks look limited."

Diane Swonk, chief economist at Grant Thornton.  Economic growth will slow to an average of 16 percent and employment gains will falter, with a better-than-even chance of a recession beginning next year. 

Robert Kaplan, president of the Dallas Federal Reserve Bank.  “The consumer is in pretty good shape. That’s a great underpinning to the economy and even though growth is sluggish, I don’t expect a recession in 2020.”

Bloomberg Economics.  “The odds may favor another year of economic growth [as the expansion enters its 11th year], but no one’s betting the farm on it.”

HOME SALES

George Ratiu, senior economist at REALTOR.COM.   U.S. home sales will decline by close to 2 percent next year as Baby Boomers “gridlock” the housing market by remaining in place, keeping a needed supply of homes off the market.  “With housing prices expected to stabilize and concern over economic uncertainty, there will be little incentive for Baby Boomers to sell in the coming year…. 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can find.”

Zillow economists.  The Baby Boomer gridlock won’t last for long.  Zillow predicts a “silver tsunami” over the next two decades, as aging boomers, who own about one-third of the nation’s homes, begin to sell them.

Sam Khater, chief economist for Freddie Mac.  The housing market “remains on solid ground with housing starts, building permits, existing home sales, and new home sales all outperforming the broader economy….Given low interest rates, modest inflation and a solid labor market, the U.S. housing market continues to stand firm, and, our forecast is for the housing market to maintain momentum over the next two years.”

Odeta Jushi, Deputy Chief Economist for First American. “Today’s numbers point to a more competitive housing market next year… [as] surging house-buying power fuels greater potential demand in a supply-constrained market….There's no evidence that these dynamics will change in 2020.”

Daryl Fairweather, chief economist for Redfin.  Low mortgage rates will continue to fuel demand, leading to the renewal of bidding wars in a supply-constrained market.  “Buyers will have fewer homes to choose from than they have in five years. But the return of bidding wars is good news for sellers who may have been holding out this year as the market stabilized.”

NEW HOME CONSTRUCTION

National Association of Realtors.  Builders will ramp up construction, easing the inventory shortage that is crimping sales – especially in the first-time buyer segment of the market. The trade group predicts that single-family housing starts likely will hit the  1 million mark in 2020, the highest since 2007.

Fannie Mae.  “Hopes for an acceleration of housing supply growth will be disappointed.”

REALTOR.COM:   “Despite increases in new construction, next year will once again fail to bring a solution to the inventory shortage that has plagued the housing market since 2017….The construction of new homes in 2019 was largely isolated to upper-tier of housing and that is unlikely to ease conditions for first-time homebuyers.”

HOME PRICES

Zillow. Home prices will continue to increase next year, but “at a slower rate,” probably less than 3 percent.

National Association of Realtors:   Median prices will increase by 3.6 percent.

Redfin.  Prices will rise by 6 percent in the first half of the year then fall to 3 percent, as more sellers put their homes on the market, “which will help to improve the balance between supply and demand by the end of the year.”