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JOBS DATA, THE FED OUTLOOK AND A NOTE ON RECESSION
Prepared by MCM, Inc.
(January 5, 2001) The December employment data do not change the prospect for a Fed ease on January 31. It is still extremely likely the FOMC will ease, with the real question now between a 25 bp and a 50 bp rate cut. The urgency that led to a shift from an anti-inflation stance to an anti-recession stance in the course of a single meeting, then to a 50 bp inter-meeting cut, leaves a good chance the Fed will cut rates by 50 bp again on January 31. It is also likely that Fed officials, once there is general agreement among them regarding the next move, will begin to hint broadly at whether we should expect 25 or 50 bp. What better-than-expected jobs data are likely to do is calm speculation regarding a second rate cut prior to the FOMC meeting.
The jobs data were badly skewed by weather effects, but that was not a surprise. The actual 105,000 job rise was not all that far above the median estimate. The Labor Department confirmed that part of the 78,000 decline in goods producing jobs was the result of bad weather in the survey week but offered no guidance on how much. In any case, some rebound in goods producing jobs in January can be expected, as the weather effect is unwound (assuming no storm in the January survey week).
The slump in hours worked and earnings, similarly, should be at least partly reversed in January as the effect of the storm wears off. Average weekly hours tend to be a leading indicator of hiring, but in this case, we doubt it is. Rather, both hiring and earnings were depressed together by the same factor and will rebound together in January. Hourly earnings were very strong (up 0.4%, making for the strongest 3-month rise since late 1997), given the slump in factory hours. Weekly earnings were depressed by the drop in hours, but with hourly earnings strong, weekly earnings (what really shows up on a paycheck) should bounce nicely in January.
One thing to note in the data is that several sectors were hiring in December, even among goods producers which lost 78,000 jobs overall. That is probably evidence of a return to normalcy in the labor market. The market had been so tight that, even in the most recent Beige Book, reports of jobs going begging due to worker shortages were noted. Job search times will lengthen a bit now, the pool of available workers will rise, but many of those laid off as the economy cools will quickly move on to another job. From jobs requiring highly specialized skills all the way to hotel service jobs, there are lots of openings in the economy. There will be fewer job hoppers and more layoffs, but those openings will keep the job data from turning ugly in the near term.
The debate is now fully joined over whether a recession is coming (or already underway). We do not expect an outright recession, though a considerable slowing is at hand. To some extent, it is the wrong question. In an economy able to grow at a sustained 3.5%-4.5%, vs the 2.0%-2.5% of a few years ago, slowing to say 1.5% growth for a couple of quarters is serious weakness. After 9 years of growth, public expectations of the economy are high. Even without an official recession (two quarters of declining output) the public will likely go through recession-like adjustments to expectations. Finally, given the pace of change in the economy in recent years, growth is probably being mis-measured as much as any time in recent history. The official data could miss a recession or report one that didn't really happen. The question to ask is how quickly the economy can again live up to its potential, in terms of low-inflation and growth around 4%.
January 5, 2001 MCM, Inc. 294 Washington Street, Suite 734, Boston, Massachusetts 617-338-9219
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