Despite the solid November nonfarm payroll report, the “doves” of the Federal Open Market Committee are likely to “shake it off” because policy makers tend to always remind investors one report doesn’t make a trend, said Carl Riccadona, an economist at Bloomberg.
However, it’s bit of a new norm in November for the labor market because if the economy is up-shifting, then it will be a very complicated first-half of next year for Janet Yellen and rest of the Federal Reserve “doves” to slowly tiptoe toward that first rate increase without riling the markets, he noted.
Asked if job gains in excess of 300,000 were sustainable, Carl said he was skeptical about sustainability. If investors looked at all the labor market indicators for November versus October, and if October’s report could be graded A, then November’s report really would have been an A-minus because there was actually some cooling.
Some of the leading indicators like plentiful, jobs and unemployment claims; there was a little bit of wobble in the data, which makes the November data look like an outlier. The economy is likely to break out of the trend going into next year. While everyone is forecasting a 2 percent growth rate in the economy and if the economy up-shifts to 3 percent or 4 percent on a sustained basis, which is entirely possible, then there will be acceleration, he explained.
Asked what could drive such acceleration, Carl said it could be achieved on the strength of domestic economy. Housing output will be faster next year while business spending outside the energy sector will be more robust next year. Also consumer spending will take off once labor force participation rate rises and the unemployed joins the economy as that will generate a lot more cash, he observed.
Asked when investors can stop worrying about “zero-hedge” (zerohedge.com) sort of concerns that “there’s absolutely no participation in the labor market and everybody is long-term unemployed, that wages are stagnant if not falling” etc, Carl said they have been valid in the early stages of recovery because the economy was just hobbling along.
The economy is indeed picking up momentum and reducing slack in the labor market. Current data such as the U6 unemployment rate or the number of individuals still unemployed show an improvement in the trends. As slack gets reduced, there will eventually be wage pressure and a whiff of that got reflected in the average hourly earnings number. In 2015, a lot more normalization in the labor market and the broader economy is likely to take place, he noted.
A lot of economists have changed their outlook for inflation recently with many forecasting Federal Funds Rate (FFR) rising to 1.5/1.75 percent by the end of 2015. Asked if that was remotely possible, Carl answered in affirmative. The Federal Open Markets Committee will be reconstituted next year and monetary-policy “hawks” such as Plosser and Fischer will be rotated out.
However, the core committee – constituted of New York Fed President Dudley, Fed Chair Janet Yellen and Vice Chair Fischer, will be occupied by moderate to dovish policy makers. Dudley has already observed the Fed can let the economy heat up because raising rates too soon would be a much bigger mistake than raising them too late. The FOMC members know how to fight inflation, but they don’t necessarily know how to fight deflation, he explained.
Asked to comment on FFR for next year, Carl said first rate-hike is likely to take place in the middle of next year and probably have two or three FFR increases by the end of the year.
A lot of economists even a fortnight ago were pushing back their rate-hike forecasts. Asked to comment, Carl said zero FFR is not an appropriate stance on monetary policy for an economy that has an unemployment rate close to 5.5 percent and a job-growth rate at more than 200,000 for many months running.
If the “grand-total” of employment gains for November is considered, i.e. the monthly job-gain for November and the previous two months’ upward revision along with the change in work weeks (the increase in the length of work-week, which means if all the workers in the workforce work just a tenth of an hour longer, that’s the equivalent of 250,000 jobs), then the “grand-total” comes closer to 615,000 jobs, he concluded.
You can watch the video here.
Contact Ulli
Comments 1
“Asked what could drive such acceleration, Carl said it could be achieved on the strength of domestic economy.”
If only. The White House with its new EPA edicts and the continuing drag of the ACA has thrown road blocks in the path of any new growth. Only a change of government that believes in fostering conditions (lower taxes, less regulations) for economic growth will change this zombie economy.