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April 08, 2006
A Mixed Reaction To A Good Jobs Report
U.S. employers added an unexpectedly strong 211,000 jobs in March and the jobless rate slipped to a 4-1/2-year low, according to a government report on Friday that underlined a relatively vigorous labor market.
The pace of hiring last month exceeded the 190,000-job gain forecast by analysts, who also had expected the unemployment rate, which fell to 4.7 percent, to be unchanged at February's 4.8 percent.
Most people found something in the report to like. Jayson at Polipundit stresses the growth in private sector employment. Kash has the picture at Angry Bear, where you will also find pgl giving a cheer for the employment-to-population ratio. Calculated Risk tracks the progress of employment growth since the beginning of last year, and makes the case that it is right on track. Captain Capitalism looks at the unemployment rate, and likes what he sees. William Polley breaks down the unemployment figure by length of jobless spells and sees an "improvement, indeed."
Not everyone was thrilled, of course. I'm inclined to stress the relative stability in recent reports -- a theme at The Capital Spectator as well -- and the broad-based nature of the job gains...
... but Tim Iacono is considerably less impressed with the "much-touted 52K new positions in the Professional and Business Services category." In a similarly skeptical mood, the Nattering Naybob looks at the breakdown of job gains and slowing wage gains and concludes: "McJobs."
The wage side of the picture seems to be the dividing line between those that think the report means the FOMC is more likely to raise rates beyond 5 percent, and those who don't. In blogland, the potential for average hourly earnings to mute the impulse to see inflationary pressures building is taken up at the Big Picture and in the aforementioned post at The Skeptical Speculator. I think that the wage part of the report, based as it is on the increasingly small share of nonsupervisory production worker, is not very informative about wage pressures more generally, but it surely did attract a lot of attention among the Fed-watching class. From the economists surveyed by the Wall Street Journal:
...the labor market is tightening. The wage number actually decelerated a bit in March, but the Fed can not be comfortable with the pace at which the labor market is moving to/through full employment... -- Stephen Stanley, RBS Greenwich Capital
The wage increase in today's report was below expectations and will not in itself set off alarm bells. But with the unemployment rate edging down again, the Fed will remain concerned about tightening "resource utilization." The overall picture -- robust growth with some threat of higher inflation -- suggests that the Fed will raise interest rates at least two more notches to 5.25% by the end of June.-- Nigel Gault, Global Insight
Meager wage growth combined with a falling unemployment rate will keep investors asking questions about the "resource utilization" justification for future FOMC rate hikes, despite a very strong household survey combined with an on-consensus establishment survey. However, we continue to believe that the unemployment rate is an important factor in wage growth. -- Drew Matus, Lehman Brothers
We believe wage pressures are unlikely unless we see further declines in the unemployment rate, or at least until the low unemployment rate has been sustained for a considerable period of time. The low unemployment rate will prompt discussions of a tight labor market... -- Stephen Gallagher, Societe Generale
... Strengthening wage gains and increased hours worked pushed our proxy for wage income up 6.8% in the first quarter at an annual rate, which is the fastest increase since the second quarter of 1999. The Fed is likely to be concerned about the continued tightening of labor markets, which should keep the Fed on track for at least two more rate hikes... - John Ryding, Conrad DeQuadros, Elena Volovelsky of Bear Stearns
We're starting to take up some of the slack in the economy, but at a pace that the Fed can be comfortable with. From Main Street's perspective, it's good news because we're now creating enough jobs to push labor force participation rates back upward towards pre-recession levels. For Wall Street, this kind of growth is well within its comfort zone. Even bond traders may go home happy this weekend. -- Bill Cheney, John Hancock Financial Services
"The March employment report has modestly raised the risk to our 5 percent one-and-done call," said economists at Goldman Sachs. "We now need a deceleration in the underlying labor market trends and the Q2 activity data to feel confident in our call."...
"The pool of available labor is diminishing and worker efficiency is growing more slowly. This adds up to a higher level of pressure on wages, and, by inference, on inflation," said Carl Tannenbaum, chief economist at LaSalle Bank...
"The Fed is obsessed with resource utilization, and is particularly obsessed with NAIRU, and thinks NAIRU is 5 percent," said Chris Low, chief economist at FTN Financial.
NAIRU, or the non-accelerating inflation rate of unemployment, is thought to be the lowest level that the jobless rate can go without triggering inflation.
... and from Bloomberg:
U.S. stocks suffered their biggest losses since February after a government report signaled wages may accelerate, spurring inflation and hurting earnings. The decline wiped out most of the market's gains for the week.
Utility shares, among the most sensitive to changes in interest rates, led today's retreat as the employment report rekindled concern that the Federal Reserve will raise rates. Energy stocks, including Exxon Mobil Corp., slipped as oil dropped from a two-month high.
But then there is this, from the Financial Times...
The March employment release is unlikely to have much bearing on monetary policy, as it has done little to alter perceptions of the state of the economy. Last month the Federal Reserve increased rates by 25 basis points to 4.75 per cent and its statement kept open the door for further rate increases. Many economists expect the Fed to pause or stop at about 5 per cent.
.. and this, from MarketWatch:
The March report shows "resource utilization" in the labor market continued to tighten in March, but the feared effects of higher wages were unrealized.
The Fed is expected to raise overnight rates in May to 5%, but further rate hikes after that are up in the air. The market still sees less than a 50-50 chance of a rate hike to 5.25% by this summer.
"From the Fed's point of view, the March employment report is right on target," said Bill Cheney, chief economist for John Hancock Financial. "We have solid job growth but no significant inflationary pressures."
I guess we have to wait just a little bit longer to see what "data dependent" really means.
UPDATE: While we obsess on month-to-month statistics, there are probably far more significant structural changes at work underneath, changes that we will only fully appreciate in hindsight. The New Economist highlights a relevant reminder of this, via an article from the BLS' Monthly Labor Review on occupational change in the United States, 1910-2000. It is an interesting read.
UPDATE II: Jim Hamilton says "the fact that [yesterday's] big interest rate moves coincided with the release of the strong employment report confirms my interpretation that increased optimism about economic growth has been the big factor driving the bond market over the last month." Writing in the comment section below, however, spencer is still looking to the carry trade.
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