By Steven K. Beckner
(MNI) – The disappointing March job figures released Friday left
analysts divided over monetary policy implications.
For some, the data had little import. For others, they reinforced
the possibility of additional monetary stimulus.
The Labor Department reported that non-farm payrolls rose by just
120,000 last month — far short of the expected 200,000 and even further
below the 246,000 average of the prior three months.
Prior months’ payrolls were revised up, continuing the recent
pattern, but only by 4,000.
The unemployment rate dipped from 8.3% to 8.2%, but this was
ascribed mostly to a reduction in labor force participation after two
months of sizable gains in the size of the labor force. In another sign
of softness, aggregate hours worked fell by 0.2%. Average hourly
earnings rose 0.2%, after rising 0.3% in February.
Fed Chairman Ben Bernanke had been warning that recent job gains
were “inconsistent” with the pace of economic growth and hence may not
be sustainable, and the March data seem to bear him out. But the numbers
are subject to varying interpretations and to different conclusions
about the likely direction of monetary policy.
For some, the slowdown in payroll growth was largely a matter of
the weather. The unseasonably mild days of January and February were
seen as boosting jobs, particularly in construction. March was seen as a
“payback” month.
But it may not be that simple, others say.
Robert DiClemente, chief U.S. economist at Citigroup, said he
found the 120,000 payroll number “not altogether surprising” because
he thinks the underlying growth trend is more like 175,000 than
246,000. So he said, “there’s more numbers like this waiting for us.”
While citing “encouraging” signs in manufacturing and government
hiring, he agreed somewhat with Bernanke that the more sizable job
gains of previous months may have reflected a “catch-up” or reversal
of the panicky lay-offs made at the outset of the financial crisis and
recession. After stretching productivity of their workforces as far as
they could, firms may have been forced to increase hiring.
But DiClemente said that if “a more normal alignment” of workforce
and productivity has now been reached, “it puts a greater onus on demand
going forward.”
It’s a point that Bernanke and other Fed policymakers have been
making. In a March 26 speech on labor market conditions to the National
Association for Business Economics, Bernanke said “to the extent that
the decline in the unemployment rate since last summer has brought
unemployment back more into line with the level of aggregate demand,
then further significant improvements in unemployment will likely
require faster economic growth than we experienced during the past
year.”
And Bernanke said “to the extent that this reversal (of
recessionary lay-offs) has been completed, further significant
improvements in the unemployment rate will likely require a more-rapid
expansion of production and demand from consumers and businesses, a
process that can be supported by continued accommodative policies.”
Neither DiClemente nor anyone else expects the Fed’s policymaking
Federal Open Market Committee to make any meaningful change in monetary
policy or policy rhetoric at its April 24-25 meeting. Thereafter, policy
will depend on whether demand is able to sustain an acceptable pace of
job growth and prevent a resurgence of unemployment.
At he very least, DiClemente said, the Fed will have to be careful
not to inadvertently signal a tightening of monetary policy earlier than
the “late 2014″ timeframe contained in the last two FOMC statements.
DiClemente said financial markets will be hanging on every word
from Fed policymakers to detect whether they might start raising the
federal funds rate from zero earlier than late 2014, so officials will
have to watch what they say.
The Fed is depending on that “communication tool” to control longer
term interest rates, so “you’ve got to make sure you guard that
message,” he said, noting, “It’s very hard to acknowledge better data”
without signalling a policy shift.
Depending on how the economy unfolds, the FOMC not be able to wait
until late 2014. But because of the potential “fiscal drag” of higher
taxes that are due to go into effect in January of next year, if the law
is not changed, DiClemente said he “can imagine the Fed riding all the
way through next year with current policy.”
Jan Hatzius, chief economist for Goldman-Sachs, was more inclined
to think that the FOMC might decide more monetary stimulus is needed,
although he wasn’t predicting it.
Hatzius said “not very much” of the March dip in payroll gains was
due to weather. He said “more than wether boosted the numbers the last
few months.” And he added, “most of the payback is ahead of us.”
“The overall evidence is that the economy is still only expanding
at a moderate pace,” he said. And so the FOMC “may still want to
consider additional easing.’
“At the June meeting it will still be on the table,” Hatzius
continued. “At that point they will have to decide whether to start
another asset purchase program, given how the economy looks.”
John Silvia, chief economist of Wells Fargo, doubted the FOMC will
approve a third round of quantitative easing. “Our bet is that the Fed
continues to pursue reinvesting proceeds but not an expansion of the
balance sheet,” he said.
But Siliva said “the drop in unemployment rate due to the lower
participation rate has to be a concern.” So he predicted “no change in
the funds rate at least thru 2013.”
** MNI Washington Bureau: 202-371-2121 **
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