Published March 06, 2014
Snow storms and extremely cold weather across large swaths of the U.S. last month likely chilled hiring by employers ... but it probably wont shake the Federal Reserve.
The monthly labor report and its headline unemployment rate, until recently a primary barometer for the health of the U.S. economy, has for various reasons fallen out of favor with monetary policy makers at the central bank.
“The February jobs report, slated for release on Friday may offer more clues about where consumer sentiment is headed than it does for future monetary policy,” said Kristina Hooper, U.S. investment strategist at Allianz Global Investors.
“That’s because the Fed is looking at a mosaic of economic data to determine whether to turn the taper dial up or down, or hold it steady.”
Still, Friday’s report on February employment will undoubtedly play a role in the Fed’s decision later this month to either maintain or possibly scale back its program for gradually reducing -- or tapering -- its monthly bond purchases.
Economists are predicting 150,000 new jobs were created in February and that the unemployment rate will hold steady at 6.6%. The numbers are once again expected to be impacted by severe weather throughout much of the U.S. in February.
“Weather effects during the survey week will undoubtedly have had some impact on the payroll numbers and a third consecutive below-trend gain is possible,” said David Kelly, chief global strategist at JP Morgan Funds.
The economy added just 113,000 jobs in January, a mild improvement over the surprisingly weak December gain of 75,000. Both meager hiring figures were blamed on snow storms and extremely cold temperatures across the country. The U.S. added an average of 194,000 jobs per month in 2013.
Weather: A Temporary Anomaly
The weather factor, viewed as a temporary anomaly by most economists, combined with a general feeling that the headline unemployment rate, now at its lowest level since the onset of the 2008 financial crisis, doesn’t accurately represent the health of labor markets has led policy makers to diversify the data they use to formulate their strategies.
A troubling aspect of the decline in the unemployment rate particularly in the past 12 months has been a parallel decline in the labor participation rate, a key gauge of the percentage of working-age Americans currently employed. The rate rose slightly in January to 63% but remains at its lowest level in four decades.
JP Morgan Funds' Kelly fears the participation rate could have fallen again in February as a result of Americans whose unemployment benefits were cut off in January, leading them to drop out of the workforce altogether.
Congress earlier this year declined to extend unemployment benefits for some 1.3 million Americans. A requirement for receiving unemployment benefits is that the recipient must be actively looking for work. When people are actively looking for work the government includes them in the workforce and counts them among the unemployed.
If they stop looking for work, they are no longer considered a part of the workforce, as they become so-called discouraged workers, which lowers the participation rate but also reduces the jobless rate because it means that fewer people are counted by the government as unemployed.
Fed Less Dependant on Unemployment Rate
People dropping out of the workforce in droves throughout 2013 – either because they couldn’t find a job or because they reached retirement age -- played a significant role in bringing the unemployment rate down to its current level. That’s why many economists are wary of using the headline number as a barometer for the health of the broad labor market.
The Fed has taken a similar approach, growing less dependent on the unemployment rate and leaning instead on a broader array of economic data points to determine future policy.
When the December and January jobs reports were released it was widely speculated that the Fed may delay its tapering program at its January meeting. But central bank policy makers, including newly installed Fed Chair Janet Yellen, have made it clear that they are balancing the string of weak monthly jobs reports against positive GDP figures and a lack of inflation.
In short, the overriding message from the Fed is that they will continue to scale back their long-running easy money policies – for the time being, at least -- even if the monthly jobs numbers continue to disappoint as a result of what they see as temporary issues. That’s a distinct possibility for the February report.
Besides, Yellen in particular has emphasized the flexibility of the tapering program, which allows the Fed to adjust its monthly bond purchases in whichever direction the data warrant.