Employment, Growth And The Taper Question

Friday’s employment number of 175K has generated both surprise and a sense that the economy may be on track despite bad weather and other less positive data. This impression was reinforced in the Federal Reserve’s Beige Book released on March 5, by the mention of the weather factor in depressing growth. Thus prepared, most observers were expecting a decline in employment because of bad weather and were consequently somewhat surprised at the February number and the upward revisions for both last December and this January, especially given the less optimistic figure released last week by ADP of 139K and ADP’s downward revision of its estimate for January. The consensus story seemed to be weather, weather, weather …

But what many don’t realize is that much of the country where employment and GDP is generated has not been significantly affected by bad weather this winter. Over half the nation’s GDP is accounted for by states that are located in only four of the Federal Reserve’s 12 districts (San Francisco, Chicago, Atlanta, and Dallas). In those districts, the bulk of the output is accounted for by four states – California (13%), Illinois (4.5%), Florida (5%) and Texas (9%). Of those four states accounting for 39% of US GDP, only Illinois suffered from this winter’s extremes. The only state in the nation with a larger share of US GDP than Florida – and one whose output might have been affected by the weather – was New York (7.7%).

In terms of employment, which was the focus of the discussions of last Friday’s release, the four Federal Reserve Districts mentioned above also account for over half the nation’s employment; and, arguably, employment gains in the San Francisco, Dallas, and Atlanta Districts would not have been significantly impacted by weather. The major states in these districts have been among the ones with the lowest state-level unemployment and have experienced more rapid recovery than in other parts of the country.

How did the Beige Book characterize growth in the four most economically significant Federal Reserve Districts? Despite the bad weather that hit the Midwest, Northeast, and Mid-Atlantic states the Beige Book suggested that growth in eight of the Federal Reserve’s twelve districts was described as “modest” or “moderate.” San Francisco and Dallas characterized growth as moderate; Chicago said stable; and Atlanta said its economy was expanding slowly. This characterization would be consistent with growth we have been observing the past several quarters (an average of 2.5% for 2013). So should the recent employment number have been a surprise? Probably not, and keep in mind that the 174K number was actually below the average of 182K we had experienced recently.

What the number does suggest is that there will be no deviation from the Fed’s tapering process. President William Dudley, president of the Federal Reserve Bank of New York, has suggested that what we might see is a change in the FOMC’s communications and a de-emphasis on the unemployment rate. Since we have argued in past commentaries that the FOMC had already effectively abandoned its 6.5% trigger threshold, a conclusion only reinforced by new Chair Janet Yellen in her recent testimony, any change in focus as the result of the next FOMC deliberations will only make explicit what has already taken place.

BY Bob Eisenbeis