ANALYSTS: US JOBS DATA TOO FLAWED TO PROVIDE MONETARY POLICY GUIDANCE
By Steven K. Beckner
Market News International - With the passage of time and the advent of another monthly employment report, September's jobs figures are apt to have little significance by the time the Federal Reserve's Nov. 16 policymaking Federal Open Market Committee meeting rolls around, analysts said Friday.
Even at this point, Fed watchers questioned how much monetary policy import last month's data on employment and labor compensation have, given special factors and statistical problems.
Non-farm payrolls unexpectedly dropped by 8,000 (the median forecast had been for a gain of 210,000), including a 21,000 decline in factory jobs. And the Bureau of Labor Statistics estimated that, even allowing for a Hurricane Floyd-related loss, payrolls would only have risen by 50,000. Analysts pointed out that September payrolls are notoriously soft because of the difficulties of adjusting for back-to-school effects and that therefore the true payroll figure, adjusted for both Floyd and other factors, was probably higher yet.
Despite the payroll dip, the unemployment rate remained at 4.2%, and average hourly earnings jumped 7 cents or 0.5% as hours worked dipped due to the hurricane.
Some drew encouragement from the apparent slowing of payroll growth, while others expressed dismay at the increase in average hourly earnings. But the overall reaction among analysts was one of distrust, in terms of what the report says about underlying labor market conditions after allowing for seasonal and weather-related factors.
Most economists agreed it is too soon for the Fed or anyone else to conclude either than tight labor market conditions are diminishing or that they are building up wage pressures and that it is best to wait for the October employment report.
Fed officials themselves have cautioned that when, after many months of strong growth, payrolls start to slow or weaken, great care must be used in interpreting those numbers because they may not signify any actual easing of labor market strains or wage cost pressures.
John Ryding, senior economist at Bear-Stearns, said the employment report was thrice-flawed as a policy indicator: because of the hurricane, because September payrolls "have typically been soft," and because the Fed will get another employment report before the next FOMC meeting.
That said, Ryding said "the wage number is the worst part for the Fed," but he doubted it will be problematic. Averaging hourly earnings for the quarter, he said the wage component of the employment cost index should be up by 0.9% to 1.0%, which would mean a year-over-year drop in the rate of increase in the ECI.
(The BLS, in the text of its report, observed, "in each of the first three quarters of the year, average hourly earnings increased by 13 cents ... . Seasonally adjusted, over the year, average hourly earnings increased by 3.8%, and average weekly earnings rose by 3.5%.")
Ryding said he does not see the payroll figures as any indication of moderation in economic activity. "I don't see the economy being soft." But he said "the Fed has the luxury to wait" before deciding whether to raise rates for a third time.
Ethan Harris, senior economist for Lehman Brothers, said the market was justified in basically "shrugging off" last month's employment report, but indicated it reinforced his impression that the Fed will stay on hold at the November FOMC meeting.
After allowing for Floyd and September statistical quirks, non-farm payrolls grew "something like 110,000," Harris estimated, "but that's two months in a row of 100,000 kinds of job gains, and that's got to catch the Fed's attention." What's more, he said the average hourly earnings gain was surely inflated by Floyd since people were working fewer hours while getting the same pay. As hours worked bounce back, average hourly earnings will dip, he predicted.
And citing the 13-cent per quarter gain in average hourly earnings, Harris said "that doesn't sound like much of a reading there."
"I don't think the Fed is going to go in November," Harris concluded, putting the odds of a rate hike at no more than 30%.
Nor did Harris sound inclined to think the Fed will need to tighten credit anytime in the foreseeable future. If unemployment stays around 4.2%, wage gains will eventually pick up, he said, "but I believe that the traditional inflation risk is being offset by non-traditional" effects, such as "the big surge in investment, the big surge in productivity, cost-cutting by corporations and the development of technology."
The United States is enjoying a "once-in-a-century phenomenon; it can grow faster and have tighter labor markets without having inflation," Harris said.
Meanwhile, First Institutional Securities partner Charles Lieberman withheld judgment on what the Fed will do Nov. 16, but said it is not plausible the economy is slowing as the Fed has made clear it desires, and he expressed concern about wage pressures.
Lieberman said "it's a good thing we're going to get another employment report," because "I don't have any confidence in this report, and I don't see how the Fed can have any confidence in this report."
Given the obvious rebound in manufacturing, the reported drop in manufacturing employment "doesn't make any sense," said Lieberman, adding that the Fed cannot rely on indications that employment growth has slowed to the extent the report suggests. To the extent employment growth has slowed, that was inevitable given the shortage of available workers, he added.
The September wage numbers "are disturbing if accurate," Lieberman said, "but I'm not sure if they are accurate." He noted that a BLS analyst was quoted earlier in the week as saying that the hurricane might cause average hourly earnings to be understated rather than overstated.
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