The Bureau of Labor Statistics’ monthly employment report is commonly thought to be one of the most important signals of major change in forthcoming U.S. monetary policy.
However, while this should be the case, lately the headline figures seem to have faded somewhat in significance, at least when it comes to foreshadowing action by the Federal Reserve (Fed).
Two Reasons Jobs Reports Don’t Foreshadow Fed Action
Reason 1: The Fed may have missed its window of opportunity
The link between the monthly payroll report and monetary policy assumes that policy makers actually heed the data, and don’t miss their window of opportunity to normalize interest rates.
But after September’s payroll print, it truly appears as if the Fed’s window of opportunity may have closed for now. Over the past three years, the Fed has effectively come to achieve its labor market goals, and such success invariably will result in a slowing of payrolls growth and a likely rise in wages, as qualified applicants leave the unemployment pool. While the September report was generally solid, with seasonality mostly to blame for the disappointing monthly payroll gain and accompanying downward revisions to July and August data, we are seeing the start of this transition.
As of September, according to data accessible via Bloomberg, the 3-month, 6-month, and 12-month moving average payroll gains came in at 167,000, 199,000, and 229,000, respectively. Though these are still impressive longer-run rates of growth, they clearly imply some slowing, as the job market’s strength over the past three years has driven down unemployment. As such, looking forward, we should reasonably expect a decline from here in gross payroll gains. In other words, the headline data may come off the boil we’ve seen in the past few months performance.
Consequently, the Fed is late in beginning policy normalization, and the central bank may find it challenging to raise rates at the same time that labor market momentum is slowing and the global economic landscape has changed. Without question, the global economy, the financial markets, and liquidity in the financial system were all more stable and supportive of a policy change many months ago, when the Fed’s employment target was clearly on its way to being met. Now, conditions are more difficult, highlighting the conundrum the Fed is in.
Reason 2: The Fed’s focus is elsewhere
With data long showing that the labor market part of the Fed’s mandate has effectively been met, the Fed is justifying the continuation of excessively easy policy at least partly based on exogenous factors, including international “headwinds” to U.S. growth. The Fed’s most recent statement, press conference and meeting minutes recognized this change in focus.
As such, the importance of payrolls as a policy predicator has paled in comparison to factors such as China manufacturing figures, industrial production and export data, the precipitous drop in commodities prices, and capital outflows/price volatility in asset classes such as emerging markets and high yield. Fascinatingly, with concerns over global growth, trade and emerging market stability at the forefront of investors and policy makers’ minds today, it’s arguably the payrolls reports of other regions that may provide guidance about U.S. policy.
Looking forward, my concern is that the Fed will continue to delay normalization further, rather than pay attention to the big picture trend evident in still solid, long-term labor market data: The U.S. economy has long been ready for liftoff. BlackRock’s proprietary “Yellen Index”, which aggregates a series of labor market and growth metrics, is still at a level seen during past periods of higher rates, as the figure below shows.
“Yellen Index” of Labor Market & Economic Indicators
The risks of policy inaction are serious. The long wait to begin the process of rate normalization has already resulted in some leverage growth in the U.S. economy, and this could grow further if liftoff continues to be delayed. In the meantime, when trying to predict policy, it’s important to remember the limits of overly focusing on payrolls figures.
About Ther Author: Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and is a regular contributor to The BlackRock Blog.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle