Jobs Data Between Puzzling and Worrisome – El-Erian

PIMCO CEO and co-CIO Mohamed El-Erian and Jason Furman, Chairman of the U.S. Council of Economic Advisors, appeared on Bloomberg Television today to discuss the jobs report. El-Erian told Betty Liu that today’s jobs report is “somewhere between puzzling and worrisome.”

Furman said, “This is a recovery that is continuing, there’s going to be volatility from month to month, but you’re seeing an economy that overall continues to strengthen.”

El-Erian on today’s jobs report:

“It is very surprising. It is somewhere between puzzling and worrisome. Puzzling because it is such a strange number – the 74,000 jobs that were created — even if you add in the revisions from last month. It is still half of what consensus was, and it is inconsistent with lots of other data. But it is also worrisome and I think we have to remember that. Because if you look within the report, you get some pretty worrisome things in terms of what is happening to labor participation. We’re back to levels that we haven’t seen since February ’78. Long-term unemployment still stuck 37%. So we’re going to learn a lot more about what is the impact of the weather, how much of this is real, how much of this is temporary. It is a shocker, to put it mildly.”

El-Erian on whether it could be a one-off that does not signal a larger trend:

I think it is in between. I think…It is definitely there’s an impact of weather that people have to sort out and find out how much of it was due to weather, but I think fundamentally it reflects an economy that is still trying to gain enough momentum. An economy that is still stuck somewhere between second and third year gear. It can drive in a much higher gear and much higher speed and isn’t there yet. Importantly, for the market, it reminds the markets, not only that the taper — although we believe that they will continue to taper, and by the end of 2014, the Fed will be out of the QE business — but it reminds the market of something that the market has forgotten in the last few weeks, and that Bill Gross has been stressing not to forget, which is that the Fed which is that the Fed is unlikely to hike rates in 2015. It is more likely to be 2016, but not 2015. So what you see is the market is starting to recognize that this means that the Fed may be less eager to not just get out of the QE business but less eager to hike rates in 2015.

El-Erian on whether the jobs report is confusing for Janet Yellen and the Federal Reserve:

They have already prepared in three ways. And they did this in the FOMC minutes that were released two days ago. First, they told us that the unemployment rate, the 6.7% now, does not capture the extent of labor market issues. Secondly, they reminded us look also at the price data – the inflation data, which is too low. So don’t just obsess with the unemployment number. And third, they reminded us that there are the issues that they’re worried about which is financial soundness. Put all of this together, this number doesn’t change the expectation that they will continue to taper, and exit QE by the end of 2014. But it does suggest that you will not see a rate hike until 2016.

El-Erian on whether we should abandon this jobless rate:

Most economists and most people, statisticians, and others will tell you that there is about a plus to minus 80,000 error range for each monthly number. So when we all in the marketplace obsess with the number and when we focus on a consensus number other than a range number, what we are doing is inconsistent with how accurate this information can be. That is the reality. Having said that, the community likes simple numbers, that is why we are obsessed with the consensus number. But the important thing is to look at averages over time and to look at the other elements, not just to obsess with one number, but to look at all the other elements of the performance report, as we do here.

El-Erian on whether this changes his forecast for earnings this year:

Not as yet, because we’re still analyzing the number, so not as yet. And also, our forecasts are based on a more holistic outlook of both the U.S. economy and the global economy. This is just one small part of a much bigger picture. That does not change anything. If anything, it confirms the view we had coming in.

Furman on today’s jobs report:

There’s no question that December was less than expected, but every month, when the numbers are good, when the numbers are less than expected, I do the same thing, and look back at what’s happened over something like the last 3 months, the last 12 months, the last 46 months. All of those tell the same story. 2.2 million private sector jobs added over the last 12 months. This is a recovery that is continuing, there’s going to be volatility from month to month, but you’re seeing an economy that overall continues to strengthen.

Furman on those who are questioning the jobs report negative indicators:

I don’t think anyone should take one month’s data and fundamentally alter their perception of the economy. A wide range of data all showed that as 2013 went on, the economy was picking up momentum. Remember, the budget deal we reached in December is gonna be really important for the economy starting January going forward. That deal isn’t even reflected in these data. There are certainly a lot of things that are volatile and bounce around a lot from month to month. For example, we lost 25,000 accounting jobs in December, according to these data. Do I think we really lost 25,000 accounting jobs in December? I think there’s probably some seasonality and fluctuation when you look at a number like that.

Furman on how today’s report is going to play with the discussions on Capitol Hill of emergency unemployment benefits and minimum wage:

I think this is just another clear argument as to why we really need to extend unemployment insurance benefits. There is a striking fact we look at the unemployment rate in these numbers – the short-term unemployment rate is now below what it was during the last economic recovery. The entire reason we have elevated unemployment is because of the long-term unemployment rate. It would be unprecedented to let emergency unemployment insurance expire with an unemployment rate at this level. I think this is clear evidence for why that is absolutely needed. There’s a lot of people are working really hard, looking for jobs. 1.3 million of them are cutoff from their benefits this past week. Their lives are difficult, we should be helping them. Minimum wage, not a lot in this report one way or another, the motivation for that continues to be that we’d like to see wage growth for families at the bottom, at the middle, and overall.

Furman on Republican opponents who might say that this is the lowest drop in jobless rate since the recession:

This is exactly why we focus on that long-term unemployment rate. That is the reason we need to extend benefits, because that long-term unemployment rate. Here’s something important to understand: right now for every job that has a vacancy, there’s three people unemployed looking for that job. That’s a lot better than a couple years ago when it was nearly seven people looking for every job, but it’s still well above the normal. Normally, you think one-and-a-half/two people looking for every job. So, we need to be doing more to create jobs for people who are working really hard to try to find those jobs, and in the meantime, we need to do more to make sure that they can pay the rent, pay the mortgage, meet their car payments and put food on the table as they look for those jobs.

El-Erian on whether Washington can afford to extend jobless benefits:

Yes it can, and it should. If you look at the three problems we have in this country, we have insufficient aggregate demand, inadequate supply responsiveness, and residual debt bubbles. The emergency unemployment benefits — in addition to being the right thing to do from a socialist perspective — helps on the demand side because the unemployed had the highest margin of propensity to consume. It also helps on the debt overhang side. Does it hurt on the supply responsiveness? Are we gonna get a major negative incentive? I don’t think so. If you look net-that, it makes both social sense and economic sense.

Furman on whether Democrats would accept a shorter extension of the benefits:

Yesterday, Senator Reid put forward an idea which was extended for a year and pay for it. His idea about how to pay for it wasn’t something he took from President Obama’s budget, it was something he took from Chairman Paul Ryan’s budget agreement from December. Before Senator Reid’s proposal, there was a bipartisan proposal from Senator Jack Reed of Rhode Island, and Senator Heller of Nevada. It got five or six Republican votes. That was a three month, clean, extension of unemployment insurance. If we can’t do a full year, if we can’t figure out how to pay for it, if we can’t do those reforms, then just do a clean three month extension that’s there on the floor of the floor in the Senate. They could pass it.

Video for viewing here and here.

Bloomberg Television

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