Another Month, Another Employment Report

 |  Includes: GOVT, PLW, TRSY
by: Tim Duy

Tomorrow brings the January 2014 employment report. The usual caveats apply:

  • The monthly change in payrolls is a net number and represents only a fraction of the churn in the labor market.
  • The employment data is heavily revised. The preliminary number can greatly understate or overstate actual labor market behavior.
  • Nasty weather might also have impacted the numbers. Robin Harding at the Financial Times identifies other factors - expiration of unemployment benefits and annual revisions - that can also scramble the final numbers in the report.
  • Forecasting the change in payrolls is thus something of a fool's game. A game we all play nonetheless.

With all that said, I will venture a guess of a 200k gain in nonfarm payrolls for January:


This is a bit over consensus of 181k, but pretty much right in the middle of the range of estimates (125k-270k). Full disclosure: Last month my forecast was wildly optimistic. Still, I think that report was an outlier. Overall I don't see that the pace of improvement in the labor market has changed dramatically one way or another in the last few months. The economy have been generating 180-200k jobs a month for two years despite the ups and downs in the data. I suspect underlying activity continues to support a similar trend. Any improvements that were evident prior to the December report were likely modest. Indeed, I am skeptical that the pace of activity overall has dramatically improved either.

As far as monetary policy, it is likely that only a very, very weak report would deter Fed officials from the current tapering agenda. Even that is in question given that we will see another employment report - not to mention a plethora of other data - before the mid-March FOMC meeting. It seems that hawks and doves alike want to wind down the asset purchase program, with the only difference being the pace of tapering. Atlanta Federal Reserve President Dennis Lockhart sums up what I believe is the consensus view:

Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year...

...But given my current views on the economy, I like the current positioning of policy.

It's in the right place for now, in my opinion. I think we policymakers should be patient-not too quick to respond to zigs and zags in the data.

Hawks, of course, would like a more rapid pace of tapering. Philadelphia Federal Reserve President Charles Plosser basically said "enough is enough" yesterday:

Notice that even though we are reducing the pace at which we are purchasing longer-term assets, we are still adding monetary policy accommodation. As I noted earlier, I believe the economy has already met the criteria of substantial improvement in labor market conditions, and the economic outlook has improved as well. So my preference would be that we conclude the purchases sooner rather than later...

...If the unemployment rate continues to drop at that pace, we will soon be at the 6.5 percent threshold in our forward guidance for interest rates.

Although the FOMC has indicated that it doesn't anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point. What is the argument for continuing to increase monetary policy accommodation when labor market conditions are improving rapidly, inflation has stabilized, and the outlook is for it to move back to goal?

Plosser would like to end asset purchases prior to hitting the unemployment threshold. Problem is, that threshold could easily be hit tomorrow if not at the next meeting. So, I guess all I can say to Plosser is "good luck with that."

Bottom Line: Even a weak employment report may not be immediately pivotal for monetary policy; there is still another report to go before the next FOMC meeting. A solid report, however, will further entrench the Fed's commitment to the current policy path.