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.
The February jobs report, slated for release on Friday, may offer more clues about where consumer sentiment is headed than it does for future monetary policy. That’s because the Fed is looking at a mosaic of economic data to determine whether to turn the taper dial up or down, or hold it steady. And winter weather, particularly in the Northeast, has given policymakers a foggy lens through which to examine the pace of the recovery.
The Stock Whisperer
The difference maker for the stock market? Janet Yellen. Last week saw stocks post gains as investors seemed to be reassured by Yellen’s testimony before the Senate Banking Committee and shrugged off the revised fourth-quarter GDP report, which showed a significant—but expected—reduction in growth for the quarter. Both events help put this Friday’s jobs report in perspective.
In her testimony to Congress, Yellen stressed the importance of continuing the same policies the Fed had in place under Ben Bernanke. She also explained that the Fed doesn’t yet know how large of a role weather played in the weak economic data we’ve seen recently. Additionally, Yellen said that the FOMC is not on a pre-set course
when it comes to tapering, and that it has the flexibility to adjust the unwinding of its asset purchases based on the pace of the recovery. While the hurdle for making such adjustments is very high, her comments left room for the Fed to slow tapering if weakness persists or worsens, which gave comfort to investors. When it comes to market stability, communication from central bankers is key. US investors, unlike UK investors, still trust their central bank’s forward guidance on its target interest rate, which is why short-term rates remain well anchored. Americans seem to recognize that tapering does not equal tightening.
Tighter With a Buck?
For their part, US investors cheered Yellen’s comments, which made it easier for them to swallow the downward GDP revision. While expected, the revision was substantial, and stemmed somewhat from all the delayed and incomplete data caused by the government shutdown. Unfortunately, the big negative change came from consumer spending, which dropped significantly. This should not come as a surprise given that consumer sentiment dropped substantially in the fourth quarter, driven by the drama in Washington. Exports fell too, which could be a concern going forward given the strengthening of the US dollar.
However, there was good news in the report too: an increase in capital expenditures. Yes, companies finally started loosening their purse strings and spending some of the historically high levels of cash they’ve hoarded in this post-crisis environment. Such a solid increase in cap ex is at least partially a result of a rush to take advantage of the tax breaks businesses were getting on new equipment purchases, which expired at the end of 2013. Still, January’s core capital goods orders rose 1.7%, which suggests the improvement in capital spending could have staying power.
What to Expect From the Jobs Report
Looking ahead to Friday’s employment report, it’s still unclear how big of a role weather will play. However, we can assume that the “snowpocalyptic” weather will have some negative impact on job growth. But we may see the unemployment rate either remain flat, or even fall, because emergency unemployment insurance expired at the end of 2013. Just as unemployment insurance extensions boosted the jobless rate in the past few years, as the Atlanta Fed pointed out in a recent report, expirations are likely driving down the unemployment rate, a trend that will probably continue.
Most importantly, a disappointing jobs report raises a lot of questions about consumer sentiment. While consumer sentiment has bounced back since the dark days of October, consumer psyches remain somewhat fragile. Indeed, further labor-market weakness or escalating tensions in the Ukraine could short-circuit the recent surge. For example, we’ve already seen consumers’ short-term job outlook take a hit in the Conference Board’s latest reading on consumer sentiment.
The bottom line: The February jobs report may not be as helpful in gauging the pace of the labor-market recovery because bad weather and the expiration of unemployment insurance could be coloring the data. But while the February jobs report on its own may not be particularly meaningful, the overall job situation is critical because of its impact on consumer moods. It’s also not likely to factor too heavily into Fed policy. While Yellen comforted investors by suggesting the Fed will continue to offer a safety net in case of an emergency, it will likely take a lot of bad news for the Fed to alter the course of tapering.
Beyond that, the employment report is just one series of data among a mosaic of economic statistics that the Fed will be reviewing, including inflation, as underscored by Charles Evans
in a speech last week. It is this holistic view of the economy and its uneven, imperfect but continuing recovery that will shape the Fed’s actions, which are likely to remain very accommodative. Think looser for longer.
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