Positive jobs report stirs debate: What will Fed do now?

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Posted: Saturday, November 9, 2013 12:00 am

The combination in Friday’s U.S. jobs report of faster-than-expected job growth in October and upward revisions for previous months strengthens the possibility that the Federal Reserve will act sooner rather than later to ease efforts to stimulate the economy.

Defying predictions that the partial government shutdown would sap job growth, private employers in the United States added more than 200,000 positions in October, well above even the most optimistic estimates on Wall Street. The Labor Department also revised upward the number of hires in August and September by 60,000.

The unemployment rate, based on a separate survey and one that counted furloughed federal employees as out of work, rose to 7.3 percent in October from 7.2 percent in September.

The central bank had initially been expected to scale back its $85 billion a month in purchases of Treasury securities and mortgage-backed bonds in September.

But the Fed and its chairman, Ben Bernanke, surprised Wall Street by holding off on the tapering process in light of mixed economic signals over the summer and lackluster job creation.

In the wake of Friday’s report, some experts said the Fed was more likely to announce that it intended to taper when policymakers next meet in mid-December, especially if the jobs report for November is similarly robust.

“The Fed now has one more payroll report before its December meeting,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients Friday. “Clearly, another report like this one will greatly increase the odds of tapering at that meeting.”

He added: “Our base case remains that it won’t happen then, but the odds have substantially improved already with the release of these numbers.”

While the stock market has often sold off on prospects for an early taper after past data releases, Wall Street rallied Friday, as traders bet that stronger economic growth and rising earnings would offset the dampening effect of less stimulus from the Fed.

Although the one-month pop in payrolls caught most analysts off guard, Guy Berger of RBS noted that the addition of 204,000 nonfarm jobs in October was in line with the 194,000 average per month of the last 12 months.

“Sometimes it’s a little faster, sometimes it’s a little slower,” Berger said. “The labor market is in decent shape, but it’s not doing that much better than six months or a year ago.”

The consensus among Wall Street economists, according to Bloomberg News, called for an increase in the unemployment rate to 7.3 percent in October, with payrolls growing by 120,000. In fact, there was an unusually large range of expectations in the days leading up to the delayed report, with economists calling for anywhere from 50,000 to 175,000 new jobs and an unemployment rate of between 7.2 percent and 7.6 percent.

The bulk of the job gains came in areas such as leisure and hospitality, retail and professional and technical services. Manufacturers added 19,000 jobs, the sector’s best showing since February, helped in part by strong auto sales. Manufacturing is closely watched as a barometer for the broader economy, so the gain in factories was particularly encouraging.

Doug Handler, chief U.S. economist at IHS, noted that 87 percent of the new jobs had come from private, service-providing sectors, like the 44,000 jobs gain at retailers, a sign that consumer spending was solid in October.

A separate question from the timing of the Fed tapering, which affects longer-term interest rates for loans like mortgages, is when the central bank will begin raising short-term interest rates from their current rock-bottom levels. The Fed has signaled that that won’t happen before unemployment falls to 6.5 percent, although some observers now think policymakers will lower that threshold to 6 percent next year.

If the economy continues to create 200,000 or more jobs a month over the next 12 months, the unemployment rate would reach 6.5 percent by December 2014. So whatever threshold the Fed ultimately chooses, it doesn’t seem like short-term interest rates will be rising anytime soon.

One mystery buried in Friday’s report was a drop of 720,000 in the size of the labor force and the ensuing fall in the labor participation rate to 62.8 percent, a 35-year low.

Although the labor participation rate has been weak in recent years as discouraged workers drop out of the workforce and baby boomers retire, it was the biggest one-month decline since the end of 2009. A smaller labor force has the effect of making the overall unemployment rate appear lower but could be a troubling sign for the long-term health of the economy.

“We’re scratching our heads,” Berger said. “You have to set this aside and look at the November report. Does it reverse? Does it keep declining? To us, it’s puzzling.”

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