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What a Mixed Jobs Report Means for Fed Easing 

Kristina Hooper 



Kristina Hooper, US head of investment and client strategies, breaks down today’s employment report and its implications for monetary policy and the economic recovery.
Talk of tapering QE is unlikely to grow louder in the near term because of today's jobs report.

The US economy added 175,000 new jobs in May, which beat expectations, but could mean unemployment will keep rising. The unemployment rate inched higher to 7.6% from 7.5% in April. That's good news because the Fed has a laser-like focus on unemployment and has tied its aggressive monetary policy to this all-important metric. The higher jobless rate should provide a little breathing room for investors who worry that the Fed will unwind quantitative easing at its June or September meeting.

Work in Progress

However, the uptick in unemployment is a sign of the flaws in the recovery. The increase was largely due to people looking to re-enter the workforce who were unable to find jobs. Non-farm payrolls—arguably a more reliable statistic than unemployment because it's based on establishment data rather than household data—positively surprised with 175,000 jobs added (178,000 from the private sector and a loss of 3,000 in the public sector) above the 165,000 economists were expecting.

It's certainly good news for the economy, but may be bad news in terms of longer-term Fed policy (fall 2013) if the FOMC believes the labor recovery is on solid footing. However, doves will likely point to the many flaws in the labor recovery:

U-6 remains very high at 13.8% (U-6 is the total unemployed, plus all persons marginally attached to the labor force, plus total employed part time because they can't find full-time work.) Comparatively, in May 2005, U-6 was 8.9%.

The percentage of "persistently unemployed"—those who have been unemployed for 27 weeks or more—remains high at 37.3% (down from 37.4% in April). In May 2005, it stood at 20.1% (it actually dropped as low as 16.9% in March 2008.)

The unemployment rate for people with less than a high school diploma dropped but remains high at 11.1%. In May 2005, it was just 7.8%.

A Moving Target?

We also have the distinct possibility that at some point, with inflation so tame, the Fed will "move the goal posts" and focus on the flaws in the labor recovery. For example, central bankers may aim to increase the labor-force participation rate, lower U-6 or zero in on some other metric beyond headline unemployment before tapering or ending QE. But they may not need to target metrics other than headline unemployment. That's because as the economy improves, the participation rate will increase and the unemployment rate will rise, particularly if those re-entering the labor force are unable to find work, like what happened in May.

We're witnessing a modest recovery in the job market, which can be seen in the increase in non-farm payrolls. However, a continuation of that trend could boost unemployment, as more people try to re-enter the workforce. That's probably good news for investors because the Fed will likely hold tapering at bay a while longer.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


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