Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies 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.
Despite the build-up, the July jobs report didn’t give us any clarity on the Fed’s plans to begin unwinding QE measures. Market watchers had hoped for clues on what the FOMC is likely to do when it meets in September. But, unfortunately, this report proved to be no tea leaf from which Fed action could be divined.
The jobs report provided some mixed signals and was a reversal of what we saw in June. While the June report showed higher unemployment and higher non-farm payrolls, the July report showed lower unemployment and lower non-farm payrolls. The establishment survey, a poll of businesses, showed 162,000 jobs created for the month, below expectations of 185,000, as well as a slight decrease in the average work week and average hourly earnings. The household survey, the less reliable of the two polls, was more encouraging. It showed 227,000 new jobs while the unemployment rate fell to 7.4% from 7.6%, beating expectations. The labor force participation rate dropped slightly to 63.4% while the employment-population ratio was flat at 58.7%.
The key takeaway is that we’re seeing gradual improvement in the employment situation. One month’s worth of data is less meaningful than the overarching long-term trend. Average monthly non-farm payrolls are significantly higher in 2013 than average monthly non-farm payrolls for 2012. That progress was supported by initial jobless claims for the week ended July 27, which came in at 326,000—a five-year low.
However, the jobs report still provides a mixed read on the economy. The same goes for the second-quarter GDP report, which showed higher growth than expected—but at the expense of a revised first-quarter reading. Overall, the economy has experienced lackluster growth in 2013. The data suggest that the Fed needs to revise its full-year GDP estimate—or that it expects 3% annualized growth in the second half of the year.
On the upside, manufacturing activity has perked up. The July ISM Manufacturing Index came in at 55.4, well above expectations and its best reading in more than two years. New orders positively surprised, as did production, which posted the strongest reading of the entire recovery period. However, regional data on manufacturing wasn’t as rosy.
In the end, the employment report didn’t give investors the answers they’re looking for on tapering. But given a potential budget battle in Washington after Labor Day, which could bring the government to a grinding halt, it seems less likely that tapering will occur in September. Keep in mind that when tapering begins, the Fed will still be expanding its balance sheet, and it has no intention of reducing its existing asset purchases. What that means is liquidity should continue to support risky assets. Further, when tapering does occur, it may look very different than what people expect. Two scenarios to consider: 1) The tapering only involves government bonds and not mortgages and/or 2) It’s a “tiny taper,” reducing purchases by only $5 billion to $10 billion a month.
So what happens in September? Chances are, the FOMC hasn’t decided yet. The only thing we can be sure of is that FOMC members will be following each piece of economic data and the unfolding budget negotiations very closely. Investors too. And we can expect more volatility as a result.
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