With the advent of the holiday season come the perennial questions: Who has been naughty or nice; will Santa bring what I asked for; will this be enough punch? Add to the list for this holiday season, will the Federal Reserve Open Market Committee taper or not? There is no store to secure this season’s hot financial item and there is no lack of chatter on both sides of the question.
The taper I refer to is the scaling back, eventually ending, of the monthly purchase by the Fed of $85 billion of securities. The FOMC has hinted at this for several months, putting it on hold at their September meeting in anticipation of the shutdown. Prior to October’s nonfarm payroll report, the consensus was that tapering had moved to the back burner, meaning 2014, due to a weak job market. The FOMC has stated their decision was data dependent, waiting for signs of a self-sustaining economic recovery and sustainable job creation trend in the employment markets.
With analysts eyes all aglow, but what should appear? A much stronger than expected October employment report. The headline number was a net increase of 204,000 jobs, roughly twice the estimate. Private payrolls increased by 212,000. Both August and September figures were upwardly revised by a combined 70,000. The trailing three month average of 190,000 is well above the average gain of 165,000 from March to July.
Despite this positive surprise, there was a lump of coal involved. The Bureau of Labor Statistics compiles the establishment survey based on filings by employers. It did not include the 800,000 furloughed government workers as unemployed as Congress provided them with back pay. The household survey, based on phone interviews during the week ending Oct. 12, did include 448,000 government workers that listed themselves as unemployed or on temporary layoff. The household survey lost 735,000 jobs in October. The unemployment rate moved up to 7.3 percent but without the government shutdown might have moved down to 7.0 percent. The labor-force participation rate declined to a 35 year low of 62.8 percent as many of the federal workers did not report themselves as seeking employment during the shutdown, resulting in a decline of 720,000 in the labor force last month. This rate will likely tick up in the coming months. The information made for a very noisy report.
With all of this clatter, analysts were left to determine what was the matter. They flew like a flash to announce that tapering would begin sooner than the revised consensus of the previous night. Given the level of noise and distortion of the employment reports, it is more likely the FOMC will await the November employment report due out on Dec. 6 (it must be St. Nick). The FOMC does not officially meet again until Dec. 17-18, plenty of time to fill the stockings or soften impact of tapering by adjusting future guidance, reducing unemployment threshold, or add inflation floor before tightening policy. By that time, we may have a better idea of what mischief Congressional elves may have planned for Jan. 15 (a budget or continuing resolution) and Feb. 7 (debt ceiling).
We do have further evidence of a strengthening economy. Third quarter gross domestic product gained a stronger than expected 2.8 percent with a significant portion due to increases in business inventories. Personal income increased by 0.5 percent in September and the savings rate rose to 4.9 percent, plenty to fund holiday shopping. However, the National Retail Federation estimates the average family will spend $537 this season, down 2.5 percent from 2012.
Adding to the uncertainty is the confirmation hearings for the nominee for the next chair of the Federal Reserve. Assuming Ms. Yellen is confirmed, she will not take office until next year. Even if November’s employment data confirms a strengthening jobs market, the members of the FOMC may just nestle all snug in their beds and settle down for a long winter’s nap.
David Helscher is a senior vice president and trust officer with Clinton National Bank.