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More Jobs to Turn Up the Taper Dial—But Not Yet 

Kristina Hooper 

The Upshot 

1/6/2014 

The job market is a focal point for the Fed and early signs point toward further progress in reducing unemployment. But don’t expect central bankers to speed up the tapering process until there’s more evidence of a turnaround, writes Kristina Hooper.
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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.


Since there are no signs of inflation, at least not in the shorter term, the focus right now is on jobs.”

The Great Recession dealt a heavy blow to jobs. However we’ve seen significant improvement in the past year and early signs—both statistical and anecdotal—seem to point toward a brighter employment picture in 2014.

In fact, jobs could play an important role in how quickly the Federal Reserve tapers its asset-purchase program. Last week, Philadelphia Fed President Charles Plosser proposed that the Fed taper its bond purchases by a larger amount at its next FOMC meeting. While he praised the Fed’s decision to taper in December, Plosser argued that “if the economy continues to grow and strengthen I think that there’s no reason why we shouldn’t want to consider speeding the process up if we can.”

Plosser’s statement raises the question of what could quicken the pace of the tapering process. Look no further than the Fed’s dual mandate of maximizing employment in the context of stable prices. Since there are no signs of inflation, at least not in the shorter term, the focus right now is on jobs.

Manufacturing Boost

Ahead of this Friday’s jobs report, we’ve seen some early clues that indicate further improvement in the unemployment rate. Last week’s PMI manufacturing reading for December, for example, points to such progress. Not only did it clock in at 55.0, the best reading since last January, but also its employment component rose nearly two points to 54.0—the best rate of monthly growth we’ve seen since March 2013. And manufacturing payrolls have risen in recent months, suggesting continued growth in that area.

Beyond manufacturing, the latest consumer confidence index reading also suggests that employment is improving. Indeed, consumer confidence beat consensus expectations in December—and even rose above November levels with consumers citing “more favorable economic and labor market conditions,” according to the Conference Board. Within the “present situation” component (which rose 2.7 points to 76.2, its highest level since April 2008) was a strong improvement in consumers’ appraisal of the job market. Individuals who consider jobs to be “plentiful” ticked up to 12.2% from 12.0%, while those who consider jobs “hard to get” decreased to 32.5% from 34.1%. This statistic has historically been helpful in forecasting where employment is headed and suggests a better-than-expected December employment report.

Brighter Job Prospects


Further, we also saw signs of a more encouraging job outlook in the “expectations” component of consumer confidence. Individuals who believe there will be more jobs in the months ahead increased dramatically to 17.1% from 13.1%, while those expecting fewer jobs fell to 19.0% from 21.4%. However, the picture isn’t all rosy as the income portion has not shown much progress, with slightly more consumers expecting a decrease rather than an increase in income in the future.

Tapering Is Not Tightening

Still, that doesn’t mean that the Fed will increase the amount it tapers in the near-term. Markets are still adjusting to the idea of the Fed unwinding its bond-buying program. Plus, incoming Fed chair Janet Yellen has noted she’s focused on a third mandate for the Fed: maintaining the stability of markets, which suggests a gradual tapering is in store.

Meanwhile, it’s also important to note that Chairman Bernanke’s recent speech to the American Economic Association actually implied the opposite of what Plosser is urging, pointing out the flaws in the labor recovery and reassuring investors that monetary policy will remain very accommodative. In addition, if inflation continues to decline, then there may come a point when the Fed decides to stall tapering.

In other words, while Friday’s jobs report is an important event on the economic calendar, it’s unlikely to alter the course of tapering for now.



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Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity.

Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 
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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