What to Make of the Market’s Reaction to the U.S. Jobs Data?

October 2, 2015

In a wide range of respects, the  labor market report fell far short of analyst expectations. 

  • The level of nonfarm payroll jobs was about 100K lower than forecast.  Employment growth of 142K was some 60K less than anticipated, and August’s gain was revised down by 37K.
  • Labor market participation slid 0.2 percentage points to 62.4%, 0.3 percentage points below the year-earlier level as well.  The ratio of jobs to the population, 59.2%, compares to 52.0% a year earlier.  Unemployment has fallen to 5.1% largely because of slow growth in the labor force.
  • A drop in weekly hours worked to 34.5 hours from 34.6 was another unexpected unpleasant surprise.
  • On-year wage growth stayed at a subdued 2.2%.  Wages did not increase on month.

The Dow Jones Industrial average fell almost immediately by 225 points at the open, or 1.4%.  The 10-year Treasury yield sliced through the 2.0% level like butter all the was to 1.93%.  Even the two-year Treasury is off at least 10 basis points at 0.55%.

The Fed has been the object of rising criticism for sending mixed cues over what policymakers might do, for leaving the federal funds rate at zero six years and one quarter into the current economic expansion, and generally for boxing itself in.  Since the September meeting, the balance of Fed rhetoric has more consistently insisted that rate tightening will begin before the end of 2015.  Ideologues consider it morally unconscionable to have left the rate at zero this long.  Market players now don’t believe the predictions of Fed officials or those who insist tightening cannot wait.  A rate hike at the end of this month has almost completely been priced out of the market, and a move by December is not given more than a one in three chance.

Here’s the problem.  The Fed observes two mandates.  It’s supposed to raise inflation to 2.0%, and officials want to see continuing improvement in labor market trends toward a restoration of full employment conditions.  The personal consumption deflator was unchanged on month in August and posted a 12-month increase of just 0.3.  Core inflation was merely 1.3%.  Meanwhile employment growth averaged 199K per month in the six months to September, down from 260K per month over the prior full year, and is thus back to the pace seen during the year through the winter of 2013-14.

The essence of the market tension over whether the Fed will tighten and whether it should do so now boils down to uncertainty over how the U.S. economy will respond.  The experiences in the past 10-15 years of other central banks that previously tried to escape ultra-low interest rates is not encouraging, but the United States is different from the average economy is several respects.  Policymaking is supposed to be based on where officials think the economy is heading, not the current conditions that are observed unless those conditions impact perceptions about the future.  And without a doubt, uncertainty and obsession over what the Fed is doing is generating undesirable volatility in financial markets, which in and of itself poses a threat to the U.S. economic outlook.  The only way to find out how well the U.S. economy can handle rate tightening is to go ahead and do just that.  When the act of delay becomes a factor weighing on confidence, the only viable course of action may be to test the waters, that is raise the rate, hope for the best, and see how the U.S. economy in fact responds.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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