On balance, most of the economic reports in recent weeks have been consistent with a moderate increase in momentum heading into 2014. However, the December Employment Report showed a surprisingly soft gain in nonfarm payrolls. Is this a sign of another false dawn in the recovery?
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The ADP estimate of private-sector job growth is not a good predictor of the month-to-month change in the official BLS figures. However, last week, a strong ADP estimate boosted market expectations for the BLS number. Surprise! Nonfarm payrolls rose by just 74,000 – far below the +195,000 median forecast. Take that with a grain of salt. We’ve seen that these figures can be revised a lot. Moreover, annual benchmark revisions are set to arrive next month. The details of the report were odd. Construction jobs fell (in contrast to a strong gain in the ADP data), but weakness was concentrated in nonresidential and in heavy construction and civil engineering. Residential construction payrolls continued to advance. Retail payrolls and temp-help were strong. Healthcare and education fell.
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Seasonal adjustment is difficult in December and can easily magnify weather effects. Things don’t get any easier in January, when we normally lose about 2.8 million jobs. Greater hiring in November and December typically leads to larger-than-normal layoffs in January (and weaker growth in seasonally adjusted payrolls). Conversely, subpar seasonal hiring can lead to few January layoffs (which show up as a seasonally adjusted gain). The bigger test will come in the spring, when hiring normally begins to ramp up. With the economy facing fewer headwinds, the pace of job growth ought to pick up. The major worry is that credit conditions will tighten. This will be Janet Yellen’s initial challenge as Fed chair: to taper without a market tantrum.
The unemployment rate fell sharply again in December, but that was due largely to a further decrease in labor force participation (which is now at its lowest level in 35 years). The household survey data continue to show a flat trend in the employment/population ratio, which suggests that we’re adding jobs at a strong enough pace to absorb the growth in the population, but not enough to recoup much of the ground that was lost in the labor market during downturn.
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In their policy decisions, Federal Reserve officials will consider a wide range of indicators. The payroll figure is only one. Still, the jobs report could generate some caution heading into the January 28-29 policy meeting. Minutes of the December policy meeting showed that officials feared a possible adverse market reaction to the initial taper, but that didn’t happen. The minutes indicated that the tapering is not on a preset path in 2014. However, most Fed officials expect that the asset purchase program will be completed by the end of the year. Doing the math, that works out to roughly -$20 billion per quarter, but it’s unclear whether that will be -$10 billion at every meeting or -$20 billion at every other meeting, or more likely, the pace will vary depending on the economic data.
© Raymond James
