U.S. job market sends mixed signals, Fed likely to stay cautious

Washington (Jan 10)  The U.S. unemployment rate plunged to 6.7 per cent in December, yet a separate survey showed employers added a disappointing 74,000 workers, a confusing signal that ensures the Federal Reserve will continue to proceed with caution.

Wall Street analysts were expecting payrolls to increase by about 197,000; their consensus estimate for the unemployment rate was that it would remain unchanged at 7 per cent. The increase in payrolls – a more accurate reading of the strength of the economy – was the weakest since January 2011.

Minutes of the Fed’s December policy meeting show “most” of the central bank’s key officials favour winding up their monthly bond-buying program, albeit slowly. The Fed tapered purchases by $10-billion (U.S.) to $75-billion beginning this month, the first adjustment in 15 months. Officials acknowledged that joblessness remains too high, but expressed broad confidence that the outlook was as good as it’s been since the end of the recession.

Investors will have to decide which is giving the more accurate reading of the economy’s health: the unemployment rate, which dropped to its lowest since 2008, or the sudden reversal of a trend that saw employers add more than 200,000 jobs in three of the four previous months.

It isn’t unusual for the non-farm payrolls survey to post big monthly declines, even in normal times. However, the unemployment rate is exaggerated by a flight of people from the labour force: the participation rate fell to 62.8 per cent in December, the lowest since March 1978.

Chances are the economy neither is as strong as the unemployment rate suggests, nor is it as weak as might be deduced by the slowing in the pace of payrolls improvement. Capital Economics, a research firm, speculated that unseasonably harsh weather at the end of 2013 impacted hiring. November’s increase in payrolls was revised higher, raising questions about why employers suddenly would lose confidence in the economy only weeks later.

“As it relates to using this data as an input in figuring out the Fed’s next move, we would advise throwing the report out, as the results deviate significantly from other jobs related data,” Adrian Miller, director of fixed income at GMP Securities in New York, told clients in an e-mail.

Just this week, a report by backroom services provider ADP showed private payrolls jumped to 238,000 in December, and the government’s weekly update on first-time jobless claims put the four-week moving average at 349,000, a level consistent with a strengthening labour market. A closely watched survey of factory purchasing managers shows manufacturers are adding workers at a faster pace, and intend to continue doing so.

In 2013, American employers added 182,000 positions a month, about the same as the previous year, the Labor Department said. The Fed, however, is more concerned about current momentum, which will dictate the outlook. With revisions, average monthly increases since August, when the economy appeared to pull itself out of a brief mid-year lull, were 185,600. That reflects an economy that is growing at a moderate pace, and likely will keep the U.S. central bank from accelerating the rate at which is winds up its asset-purchase program. Most Wall Street economists expect policy makers will shave purchases by an additional $10-billion when they meet at the end of January.

Oddly, hiring in the health industry abruptly stalled in December, dropping the average monthly gains in the sector to 17,000, raising questions about whether the controversy and confusion over the roll out of the President Barack Obama’s health-care overhaul affected hiring decisions. The health-care industry averaged monthly jobs increases of 27,000 in 2012.

Retailers led in December, adding 55,000 positions, and factory payrolls increased by 9,000. Construction dropped by 19,000.

The biggest mystery within the jobs numbers is why the participation rate keeps falling even as other indicators suggest the economy is getting stronger. Almost 40 per cent of America’s unemployed – some 3.9-million people – have been without a job for six months or longer, a discouraging picture that suggests jobs still are difficult to find. The simple answer to the weak participation rate is that millions of workers simply have given up looking for jobs. (Respondents to the Labor Department’s survey must be actively looking for a job to be considered part of the labour pool.)

But it’s not as simple as that. The Labor Department said 2.4-million people were “marginally attached” to the labour force, a group it defines as people who have looked for work in the previous 12 months, and either wanted or were willing to take a job. Of these people, 917,000 said they weren’t actively looking for a job because they felt none could be found. Such “discouraged” workers numbered 151,000 fewer than in November. Everyone else had dropped out of the labour force for other reasons, including school and family obligations.