Kristina Hooper, US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
In today’s economy, surprises seem to be the norm.
On Friday, the Bureau of Labor Statistics released a surprisingly positive jobs report, which showed that the US economy added 204,000 jobs in October, well above the 120,000 jobs economists were expecting. It was the first time non-farm payrolls exceeded 200,000 jobs since March. And private payroll growth was even better, adding 212,000 private-sector jobs. Further, September non-farm payrolls were revised upward to 163,000, and August non-farm payrolls were revised upward to 238,000. That’s a net gain of 60,000 jobs in two months. Stocks rose in response to this report, while Treasuries sold off in anticipation of the Federal Reserve paring its bond purchases sooner.
Perhaps this is the season for surprises: The Fed’s decision not to begin tapering in September. The glitches plaguing the launch of the Affordable Care Act website. And the ECB’s unexpected interest-rate cut last week.
Logically, there are sound reasons to be shocked and somewhat incredulous about this jobs report. First, the October ADP report, which has become a good predictor of private-sector job growth, showed a smaller-than-expected rise of 130,000 jobs. And the September ADP report was downwardly revised by 21,000 jobs to 145,000. Second, we’re seeing headwinds for job growth. For example, Challenger, Gray & Christmas found that US companies averaged more than 45,500 layoff intentions in the past three months, an increase from the less than 38,000 in the four prior months. But it’s not just job growth. Initial jobless claims have also spiked recently.
Still, business confidence has rebounded significantly, as we’ve seen in recent PMI readings, suggesting companies’ greater willingness to hire. But if there was such robust job growth, one would think we would see it reflected in consumer sentiment and spending. Yet consumer confidence is down. The University of Michigan’s consumer sentiment index came in at 72, extending its recent free fall. The biggest area of weakness was in expectations at 62.3—a big drop from July's peak of 76.5—which usually reflects employment conditions and outlook. This is borne out in spending statistics. For example, in September, consumer credit rose $13.7 billion, higher than expectations. But in a continuation of a trend we’ve seen for a while, the growth came entirely from non-revolving credit, which rose $15.8 billion. Drilling down, the increase in credit was largely due to the government’s student loan purchases. Meanwhile, revolving credit is down $1.2 billion, marking the fourth straight monthly decline, and suggesting anemic consumer spending.
Undoubtedly, the latest jobs report raises questions about the Fed’s next move. Keep in mind that, while there were some positive surprises in the report, there were also some disappointments. The unemployment rate rose to 7.3% while wage growth gained only 0.1% for average hourly earnings, which was lower than expectations and flat from the previous month. The average workweek remained at 34.4 hours, in line with the previous month but below expectations. And perhaps most notably, the labor force participation rate dropped to 62.8%. It’s important to note that this drop in the participation rate could be due to a misclassification of federal workers temporarily laid off, which means they avoided contributing to the higher unemployment rate. In other words, the 0.4% drop could have prevented the jobless rate from rising more than 0.1%.
So, while the October jobs report increases the chances of tapering beginning in December, it seems that central bankers want to see more affirming evidence. The November jobs report would have to confirm the positive surprises seen in October—and some improvement in the areas of weakness—before the Fed acts. Remember, the Fed said in October that it would wait for the labor market to improve “substantially.” It certainly has the luxury of time given that inflation remains low. In addition, we think it’s quite plausible that when tapering begins, the Fed will also lower its unemployment target—as suggested by several reports from Fed officials last week—to ensure rate expectations remain very low until 2015.
It’s been said that, “There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare.” While the October jobs report was a stunner, we need to brace for the known risks that we’re ill equipped to manage.
The Upshot is available as a subscription for financial professionals only. New issues will be delivered via email every Monday. Your email address must be in our records for your subscription to take effect.