May 04, 2013
The April Jobs report was better than most economists (including me) had expected. Better news is always better than worse news, but it was one report amidst a lot of other less than stellar news. Furthermore, it just was not that good.
Nonetheless the front page Post story hyped the good news in the report and told readers [in print edition only]:
“The jobs report could also have significant implications for the Federal Reserve’s $85-billion-a-month stimulus program. .. The program is tied to the outlook for the labor market, and some officials have begun suggesting that job growth could accelerate enough for the Fed to begin winding down the purchases this year.”
The Post, like most major media outlets have been shooting from excessive optimism to excessive pessimism about the economy consistently failing to keep their eyes on an underlying trend
of weak growth. (Neil Irwin’s blogpost yesterday gets the story almost exactly right.) Just last fall the Post and other news outlets were filled with pieces about how uncertainty over the “fiscal cliff” was already slowing growth and deterring investment. Somehow the people doing the investment did not get the message, as investment rose at a 13.2 percent annual rate in the quarter.
In terms of current data, the Fed probably noticed that new orders for non-defense capital goods (excluding aircraft) were still almost 4.0 percent below their January level in March, even after a 0.9 percent increase from their February level. The March number is less than 0.2 percent above the year ago level. The Fed probably also noticed the construction data released by the Commerce Department last week which showed that total construction spending fell 1.7 percent in March driven by a 4.1 percent falloff in spending by the public sector.
The Fed has probably also noticed the GDP report. While overall growth was 2.5 percent, a full percentage point was due to inventory accumulations. Final demand grew at just a 1.5 percent annual rate. Over the last year, GDP has grown at just a 1.8 percent annual rate, well below the 2.2-2.4 percent rate that is generally viewed as necessary to keep the unemployment rate from rising.
The Fed is probably also aware of the fact that the numbers in the April jobs report were not especially positive. With an underlying growth of the labor force of 100,000 a month, the April rate would imply that we are reducing the number of unemployed at the rate of 65,000 a month. If it will take 2,000,000 new jobs to get the unemployment rate down by a percentage point to the Fed’s 6.5 percent target for pulling back from stimulus (this assumes 500,000 return to the labor force), the April rate will get us there in the middle of 2016. Even if we take the 212,000 average growth rate of the last three months we would still be looking at December of 2014.
It is likely that the Fed (unlike the Post) noted the sharp drop in the length of the average work week. This led to a drop of 0.4 points in the index of total hours worked, tying for the largest drop since the recovery began. The Fed probably also noticed the 1.0 percentage point drop in the share of unemployment attributable to people who voluntarily quit their jobs, bringing it back near the lows for the downturn. This is an important measure of people’s confidence in the labor market.
In short, one hopes that the Fed would not allow itself to be too influenced by a single report that seems to conflict with the direction of a great deal other economic data. It is unfortunate that many reporters seem unable to manage this task.
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