My first thought on the employment report is that, at its core, it was more of the same. For the last two years, nonfarm payrolls growth has shifted between promising and disappointing on the drop of a hat. Underneath the drama, the labor market continues to grind forward at a suboptimal pace – a pace that allows for a slow decline in the unemployment rate, but also suggests more policy action is necessary.
My second thought is that San Fransisco Federal Reserve President John WIlliams was likely far too optimistic in his assessment that the Fed could begin tapering off QE as early as this summer. That is only three months away, and I have trouble seeing how policymakers could be sufficiently confident in the pace and sustainability of the recovery to justify taking their foot off the gas after just three more months of data.
Headline nonfarm payrolls gained by just 88k, with a 95k in the private sector offset by a 7k loss on the public side of the ledger. To be sure, some of the sting was eased by upward revisions to the previous two months, but I think that is cold comfort at this point. Instead, anyway you slice it this report does not signal that momentum is building in the labor market. Notice that the twelve-month average is slowing declining, and stands at 159k/month, down from 202k/month last March:
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Arguably, momentum has faded over the past year. Put in context of the Yellen batch of indicators, there is little reason to believe that the Fed should shift policy gears anytime soon:
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Other indicators were generally consistent with the tenor of the headline establishment number:
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Wages, the labor force participation rate, and the employment to population ratio all slipped. On a positive note, aggregate weekly (private sector) hours gained, consistent with what I believe is a more steady underlying improvement in the labor market than suggested by the month-to-month volatility of the headline numbers. There was little evidence of an acceleration in the pace of improvement in measures of underemployment:
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Underemployment measures suggest substantial slack in labor markets – plenty of slack to justify ongoing QE at the current pace for most of the year at least, even if the next six reports showed nonfarm payroll growth of 200k+. It makes me wonder what WIlliams was thinking pushing for the end of QE to begin this summer. Are FOMC members more eager to pull the plug on QE than public statements would suggest? Have they been spending too much time with their European counterparts? Something to mull over.
In any event, bond markets continue to suggest that any Fed officials who want to pull the plug on QE this summer are getting ahead of themselves. The 10-year Treasury yield fell to 1.69% this morning – not exactly a ringing endorsement of the pace of recovery.
Bottom Line: Another in a long line of employment reports that suggests the much hoped-for acceleration in job growth remains out of reach. Nothing to suggest the Federal Reserve needs to slow the pace of asset purchases in the near future. Williams’ expectation that tapering off of purchases as early as this summer remains puzzling.
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