Jobs Growth: Into the Vortex?—Weekly Market Review
The bad news about last week’s December payrolls report was that far fewer jobs were created than the consensus had been expecting. The good news is that financial markets don’t seem too perturbed. With the economy continuing to plod along and the Federal Reserve finally having started to taper its long-term asset purchases, investors may no longer be on tenterhooks the first Friday of every month, when the Bureau of Labor Statistics releases its Employment Situation Summary.
If so, it’s just as well. While the information in the two components of the report, the Household Survey and the Establishment Survey, are critical to understanding labor market conditions, there is a fair amount of “noise” in the data from month to month, including seasonal adjustments, sampling errors, and so on. When markets are acutely focused on the probability of an event that depends in large part on changes in payrolls, such as the start of tapering, it is especially tempting to obsess over a month’s worth of data, even knowing that revisions are all but inevitable. So what should we make of the fact that nonfarm payroll employment rose only 74,000 in December—far less than November’s (dramatically) upwardly revised 241,000 gain and the consensus estimate of 200,000 for December?
There’s no question the labor market weakened, especially among government employees (at all levels), the weather-sensitive construction sector, motion picture and sound recording employees, and (to a lesser extent) the healthcare industry. Many other areas, however, saw job gains, including retail and wholesale trade; professional and business services; manufacturing; and mining. Whether the relative weakness continues, we do not know, but the three month average of just under 172,000 payroll additions is in line with the pace of gains we saw throughout 2013.
The unemployment rate unexpectedly dropped from 7.0% to 6.7% in December and is now within striking distance of the 6.5% threshold below which the Fed has indicated it would start taking a closer look at tightening monetary policy. The decline, however, is primarily due to a decline in the labor force participation rate, meaning that as the population grows, a smaller proportion of potential workers is actively seeking work. Some jobseekers have given up looking, but much of the decrease in labor force participation is due to Baby Boomers retiring.
Still No Fed Tightening
The Fed has been clear that its unemployment threshold is not a binding target, and that it would assess the underlying strength of the job market (as well as inflation) when considering whether to raise interest rates. Fed officials undoubtedly grasp the shortcomings of the unemployment rate in the context of falling labor force participation, so tightening almost certainly remains off the table for quite some time, even if the unemployment rate continues to fall. In fact, with emergency unemployment benefits having been shut off for 1.3 million people on December 28, it’s likely that labor force participation will see an additional hit in January unless Congress agrees to reinstate these benefits (Senate negotiations were ongoing as of this writing, and it remains unclear what House Republicans would be likely to agree to, even if some of their Senate counterparts crossed the aisle and supported an extension).
If anything, last week’s jobs data increase the probability that the Fed will slow its tapering program. Other measures of the strength of the economy remain reasonably encouraging, however, so the Fed seems most likely to follow the patient but regular reduction in asset purchases that it announced in December.
Manufacturing, Exports Point to Growth
Coming on the heels of a strong December ISM (Institute for Supply Management) Manufacturing Index reading, last week’s November factory orders data bolstered the notion that manufacturing remains an area of strength in the U.S. economy and a modest contributor to employment. Orders rose a better-than-expected 1.8% in November, or 0.6% excluding the volatile transportation sector. Shipments picked up, and inventories remained steady, while unfilled orders rose for the eighth month in a row.
Helping to support manufacturing (and services, for that matter), are decent exports. November saw the trade deficit decrease to its narrowest since October 2009. A shrinking petroleum gap played an important part—a trend that should persist as the U.S. energy revolution continues to play out. But exports were solid, rising 0.9% in November on decent overseas demand for U.S. made industrial supplies, aircraft, and non-auto capital goods.
Draghi’s Open-mouth Operations Seek to Forestall Eurozone Disinflation Risk
With Eurozone annual inflation running at just 0.8% in December (its lowest rate ever) and the economy expanding just 0.1% from the second to the third quarters of 2013, European Central Bank (ECB) President Mario Draghi insisted last week that the central bank would stay accommodative for as long as necessary and take “further decisive action” if inflation continues to weaken or if money market rates rise. In a news conference following last week’s ECB policy meeting, Draghi said the bank had strengthened its forward guidance and was prepared to go still further. Although he didn’t name any specific policies he had in mind, his comments at least raise the possibility of large scale asset purchases, which would be controversial among many Eurozone members, particularly Germany.
Draghi is likely hoping that simply promising action (if warranted) can substitute for action itself, as was the case when he committed the bank to doing “whatever it takes” to ensure the survival of the euro in 2012. The effects of last week’s statements remain to be seen, but the currency bloc has a long way to go before inflation reaches the ECB’s target level of 2.0%. While we have seen some “green shoots” in recent weeks and months (including encouraging PMI, retail sales and industrial production numbers last week), the Eurozone will continue to wrestle with an array of difficult structural challenges.
Chinese Trade Helps Support Growth
China’s imports rose 8.3% in December, the most in five months, according to data released last week. Exports, meanwhile, grew 4.3%. In total, China experienced a trade surplus of $25.6 billion—the biggest since 2008 and the third-largest gap ever. The data may be lower on a seasonally adjusted basis, and there is some question as to the reliability of the export data, given a history of fake invoices. Overall, however, China appears poised to take the top spot globally in the value of merchandise trade.
Importantly, the strong import data suggest solid domestic demand at a time when many are concerned over the strength of the Chinese economy. That demand also provides a boost to China’s trade partners, including the U.S. and the Eurozone. The apparently solid export figures also bode well, as those exports can be expected to help pay for China’s full slate of proposed reforms.
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