Weak Jobs Report May Cloud Fed’s View



December’s job report, which was released on Friday, fell well short of expectations. Businesses added only 74,000 jobs during the month, well short of expectations of nearly 200,000. The weak result was far short of many other reports about job market activity, including those from the consumer confidence survey, the Institute for Supply Management (ISM) non-manufacturing survey and the ADP report (ADP is one of the nation’s largest processors of employee payrolls).

One positive note from Friday’s news was the substantial upward revision to November’s tally, which was increased from 203,000 to 241,000. Normally, improvements to prior month’s estimates are an indication of a strengthening job market. As such, it seems possible that December’s figure could move higher when next month’s data is released.

At the same time, the unemployment rate fell from 7.0% in November to 6.7% at year end. However, this decline is attributable to more people leaving the labor force, lowering the number of people counted as unemployed. We have also highlighted this ongoing trend in past notes.

Beyond those companies that are able to conclude an ongoing search, our experience tells us that many companies do not actively hire as the year comes to a close. We think it’s at least possible that a higher-than-normal number of people stopped looking for jobs late in the year. The decline in the participation rate is likely being driven by other unusual labor-force flows, such as, aging workers retiring, the lure of government disability payments, discouraged workers and other factors. This can make the jobless rate a somewhat misleading indicator of the job-market’s overall health.

Other factors that could have led to the disappointing number of new jobs include the cold weather that swept much of the country, which could have particularly impacted workers in the energy and construction industries.

In December, the Fed announced plans to start tapering its monthly bond purchases by $10 billion. Friday’s report makes it harder to forecast the outcome of the Fed’s next meeting later this month. Several factors including, weather-related effects, the potential for revisions and the contradiction the number presents relative to other indicators of labor market strength stand in opposition to the December report. As a result, we think it is unlikely that this report alone will change the Fed’s plans to gradually scale back Quantitative Easing. One data point does not necessarily mean a change in trend. We will continue to monitor activity and its potential impact on the market as well as the stocks held in client portfolios.