Friday’s dismal jobs report, showing only 38K new jobs created in May, will now make it difficult for the FOMC to sell a rate increase at its June meeting.
While there is a tendency to focus on the raw jobs number, it is worth noting that the confidence interval around that estimate is very large; it presently is 115K, which means that there is a 90 percent chance that the true number of jobs created lies between 153K and -77K. In short, there is substantial uncertainty about the true jobs picture.
The slowdown in jobs growth is but one of a number of indicators that the economy is still not on a robust path, and threatens the FOMC’s ability to achieve its inflation target. Here are the obstacles that would have to be swept away and/or overlooked in order for the Fed to raise rates this month:
First, the only data on GDP performance this year is for Q1. That came in originally at 0.5%, and the meager 30 bp revision to 0.8% is not indicative of an economy that is likely to take off. This impression is now supported by several other readings on Q2 performance.
The Fed’s Beige Book, which is a broad reading on local economic performance in the current quarter, reports only moderate or modest growth: Chicago and Kansas City reported slowing growth; Dallas indicated that growth was marginal; and New York reported flat growth. This is not much different, though perhaps marginally worse, than was reported in the previous Beige Book.
The reports from businesses are not much better. Corporate earnings for Q1 were very mixed. The Federal Reserve noted a decline in productivity in Q1. The NFIB survey for April, while up one percentage point, revealed that business pessimism remained high and weak sales and a poor economy were major concerns.
Two notables in that survey were double-digit declines in expectations for business conditions and earnings. Similarly, the latest Chicago Fed Survey of Business Conditions showed a slowing in April and early May. Consumer confidence has also slipped, and the Chicago Purchasing Manager’s Index (PMI) slipped below 50%, again suggesting that a slowdown may be underway.
To be sure, there are some positives. For example, consumer spending has held up, and housing sales and prices are firm. Auto sales, for example, were up 3% in April. In addition, the Census Bureau’s durable goods report for April showed a gain in new orders, up three of the past four months; and a significant increase of was noted in both shipments and unfilled orders.
Indeed, it is likely that FOMC proponents of a rate hike in June would rely on such positive data to bolster their case.
However, as we know, the FOMC has consistently indicated that its policies will be dependent upon incoming data. We already know that the incoming labor market data are weak and concerning. But the FOMC also has an inflation objective and has targeted the Personal Consumption headline price index at 2%. Incoming data have not been encouraging on that front either. In fact, the most recent PCE headline price index is running nearly one full percentage point below the FOMC’s target and has shown little indication that demand conditions are likely to push prices higher in the near term.
These incoming data, combined with a bias on the part of many FOMC participants to balance the risks of another rate hike against the risk of exacerbating a possible slowdown, suggest that there is now little likelihood of a policy move in June.
Indeed, Governor Brainard, perhaps one of the most cautious FOMC members when it comes to supporting a rate hike, noted after the release of the jobs number that the Fed should wait for more data before moving again.
Similarly, Federal Reserve Bank President Lockhart, said today on Bloomberg television that he personally thought the combination of the jobs number and uncertainty over Brexit warranted patience (read: no June rate hike) on the part of the FOMC. Boston Fed President Rosengren, who is a voting member of the FOMC this year, hinted in Helsinki that June was probably now off the table as well.
Finally, in her speech today in Philadelphia, Chair Yellen provided a tour de force of the current state of the economy, job market and inflation outlook. There were two key takeaways that may provide some clues as to her thinking about the possibility of a rate move in June.
First, she emphasized a wide range of uncertainties concerning the outlook including: the international situation, the jobs situation, concerns about the low productivity growth, and inflation below the FOMC’s target. Such a long laundry list isn’t consistent with a risk management approach to policy preferred by many FOMC participants.
Second, she argued that the current stance of policy, in her view, was appropriately moderately accommodative. Those considerations don’t suggest anything other than that the FOMC can afford to be patient when proceeding with further rate hikes.
Chatter following the release of the jobs report, together with the subsequent statements by FOMC participants, indicates that June is not likely to see a rate hike by the FOMC, and the focus has now turned to the FOMC’s July meeting. July is, in our view, a long shot. The next likely opportunity for a potential rate hike is September.
There are four reasons for this conclusion.
First, by the July meeting, the only additional information on aggregate growth that will be available to the FOMC is the third reading on Q1 GDP. Second, there will be only one more month of jobs data available. Third, there is neither a press conference scheduled, nor will a set of new SEP projects by the FOMC be available for the September meeting. The data would have to show a stark turnaround to trigger a rate change in July.
Finally, by September, the FOMC will have had two readings on Q2 GDP plus a new set of projections upon which to base a move, if the data suggest that a rate hike would be appropriate.