Fed: NFP Reaction Function

Published on May 2, 2014

The first reaction of Federal Reserve officials to this morning’s strong Nonfarm Payroll numbers was probably that a few more of these prints would be sweet.

It is just one number, always subject to revisions, but still, a broad-based gain of 288,000 jobs — lifting the three month average to 238,000 — and a headline rate falling to 6.3% is impressive. And decent revisions also marked up the February and March numbers, to 222,000 from 197,000, and 203,000 from 192,000 respectively.

But two aspects to the NFP breakdown stand out, that suggest caution in reading too much into the dramatic fall in the headline unemployment rate and job gains:

*** Both wage growth and the work week were flat with average hourly earnings steady at $24.3, and at an 1.9% average over the last 12 months, barely half the near 3.6% plus sustained wage growth the Fed would prefer to see. The average work week was also flat at 34.5 hours. The figures for those working part time but wanting full time work also rose from March and remains high, pointing to what most Fed officials see as considerable labor market slack and a recovery that still lacks upward pressures on prices. ***

*** On the one hand, the fall in the participation rate to 62.8% might point to a tightening in the labor market. But the Fed is likely to see the dip as temporary, due to the effects of the longer term unemployed dropping out of the labor force in giving up hope of Congress extending benefit payments for the long term unemployed. For the most part, the Fed still expects the participation rate to slowly rise as a sustained growth in aggregate demand leads to steady improvements in job creation and a falling headline unemployment rate. ***

The Fed is mostly ignoring the dismal 0.1% GDP print for the first quarter this year as more noise than signal. The monthly NFP is far less noisy, but April’s value is for now still mostly in providing reassurance on the merits of the taper and the low rates guidance, and that it is pretty much on the mark for the current central tendency forecast of a near 3% growth this year.

That, as we have previously written, is for a Fed that has marked down the economy’s trend potential, a “good enough” economy that will continue to bring unemployment down, slowly edge the participation rate up, and moderate the hoped-for gains in wages (see SGH 4/22/14, “Fed: Twists and Turns”).

The Fed, in other words, would need to see many more months of these kinds of numbers, with a bit more pick up in wages for good measure, before the labor market data moves the needle in their forecasting models, especially in affirming their expectations of at least a modest rise in the inflation measures through the year.

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