Wednesday, September 18, 2013

No Taper in September

To the surprise of many, the Fed decided not to begin tapering QE3 at its meeting today.  Personally, I expected a modest taper of $10 billion (in other words, it would start purchasing $75 billion worth of Treasuries and mortgage-backed securities each month instead of $85 billion).  What happened?  I think many on the Fed had been concerned about excessive leverage and speculation in the system as evidenced by record-low long-term interest rates, record low interest rates on high-yield bonds, etc.  Once the possibility of tapering began to be discussed, there was an unwinding of risk in financial markets (higher long-term interest rates (including mortgage rates), interest rates on high-yield bonds, etc.).  Since this mission was accomplished, even more than what the Fed had expected, the Fed could turn its focus back to the economy.  As discussed in previous posts, the economy is growing at a modest pace and there is question as to how much the spike in interest rates will affect economic growth in the coming months.  Together with continued low inflation, the Fed felt comfortable delaying tapering until at least its next meeting.

Was this the correct move?  It's debatable (I would have voted to taper a little).  Hopefully it'll provide further stimulus to the housing market and the rest of the economy without reigniting excessive speculation; only time will tell.  Financial markets have responded by increasing stock prices and oil prices by more than 1% (compared to before the announcement) while driving down the yield on the 10-year bond by about 0.2% (as of 3pm on September 18).

What's the Fed's outlook for the economy in the coming years?  Here's a link to its latest forecast.

Friday, September 6, 2013

August Employment Report

The headline numbers from today's report on the job market are that the unemployment rate declined to 7.3% and the economy added 169,000 jobs.  Beneath the surface, the report shows some weakness.  Job growth for June and July were revised down by more than 70,000; employment growth has averaged 148,000 per months over the last 3 months (just under 158,000 in the private sector).  Nearly one-third of net jobs created over the last 3 months have been in retail trade and 2/3 have been in retail trade, food/drinking places, temp jobs, and home health services (relatively low paying jobs).

Why did the unemployment rate decline?  The labor force participation rate fell to 63.2%, the lowest since the summer of 1978.  A major reason for the decline is that, for men over the age of 20, the participation rate declined by 0.3% to 72.3%, the lowest since records started being kept in 1948 (the participation rate didn't change for adult women).  The employment-population ratio declined slightly to 58.6%, which is where it began 2013 (and 2012).  As with the participation rate, the employment-population ratio declined significantly while it rose slightly for adult women.  What about part-time vs. full-time jobs?  There was a shift from part-time to full-time employment last month (modest increase in full-time jobs, noticeable decline in those working part time for economic reasons), but 60% of net jobs created in 2013 are still estimated to be part time.

Add it up and the job market is improving modestly (not as strong as some were thinking).  On a positive note, the ISM service index for August was very strong and auto sales have risen to the highest level since 2007.  On the flip side, it remains to be seen how much a drag the recent spike in interest rates will have on the economy.  So how's the economy doing?  Modest growth in terms of output (GDP) and jobs with some preliminary signs of a possible pickup in the coming months.