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.
Fear of holes in the jobs comeback story is likely to keep the Federal Reserve from tapering its asset purchases at its December FOMC meeting.
While there are ample reasons to cheer the November employment data, the bigger picture is that the jobs recovery is still slow and structurally flawed. The Fed is concerned about the rising duration of unemployment and will look for further progress in labor-market conditions before paring its bond-buying program.
Friday’s jobs report was indeed impressive. Non-farm payrolls grew 203,000, well above expectations, while the unemployment rate fell to 7% from 7.3%. In addition, October non-farm payrolls were revised down to 200,000 from 204,000, while September non-farm payrolls were revised up to 175,000 from 163,000 for a net gain of 8,000 jobs. Other good news included a slight increase in the average hourly workweek and average hourly earnings.
Further, employment gains were broad, with many industries adding jobs. One area that experienced substantial growth was the manufacturing sector, which added 27,000 jobs for the month. For the first time since 2009, there are more than 12 million factory employees. This supports our view that the manufacturing sector has some potential, buoyed by a variety of factors including lower energy costs. However, some industry gains could be seasonal. For example, 31,000 transportation and warehousing jobs were added last month along with 9,000 courier and messenger positions, 11,000 truck and air transportation jobs, and 5,000 warehousing and storage jobs.
Working Out the Kinks
While this was a good report, it was certainly no blowout as distinct areas of weakness remain. One flaw is the labor-force participation rate, which recovered some of the ground it lost in October but remains very low. Defined as those who are employed or actively looking for a job, this statistic can provide insight into how many potential workers are discouraged, or on some form of public assistance. Another measure is U-6, which is the broadest measure of unemployment and includes “marginally attached” workers—those who want a job but are not actively looking for one, and those who would like full-time employment but have to settle for part-time employment. In November, U-6 improved but it remains above the 13% level. This suggests that there’s still a lot of slack in the labor market.
Meanwhile, the percentage of unemployed people who have been jobless for 27 weeks or more actually increased to 37.3%, up from 36.1%. This group, which I like to call the “persistently unemployed,” is high relative to historical norms, and has increased the average duration of unemployment for all jobless Americans to 37.2 weeks. This is troubling because we know that the longer someone is unemployed, the harder it is for them to find a job. Also, the longer someone is unemployed, the more they deplete their personal finances and the closer they come to losing unemployment benefits.
Justifiably, the Fed seems concerned with a long unemployment duration, with Janet Yellen specifically citing the metric as a sign of weakness in the job recovery. In fact, some economists argue that the non-accelerating inflation rate of unemployment (NAIRU)—the level of unemployment that exists in an economy that doesn’t spur inflation—has risen because of increased structural unemployment, rather than just rising cyclical unemployment. It’s all part of the trend we’re seeing toward reduced pricing power for labor.
Simply put, we don’t expect the latest jobs report to alter the Fed’s taper timeline. While we believe the employment situation is improving, we also recognize it has significant flaws. That, coupled with the potential for another government showdown over the budget or debt ceiling, or both, is likely to cause the Fed to sit on its hands in December. The Fed will most likely resist tapering until the first quarter of 2014. And its decision will remain strictly data-dependent. The Fed’s clearly watching not just the headline numbers, but also lies beneath.
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