Friday’s jobs report was the final nail in the coffin for an interest rate increase in 2015.
I know I shouldn’t get carried away by one statistic, especially this early into the year. The nonfarm payrolls report is only one number – an important number, for sure, but still only one number – so one shouldn’t base his entire opinion on it. And I’m not. But the lackluster figure was just the latest evidence of just how weak the U.S. economy has gotten over the last several months and merely confirms the trend – with an exclamation point.
The Labor Department said nonfarm payrolls grew by only 126,000 in March, the smallest gain since December 2013. To add insult to injury, February’s increase was revised downward by more than 30,000 to 264,000. That brought down the average monthly gain in the first quarter to 197,000, down from 324,000 in the fourth quarter of 2014.
The bond market’s initial reaction to the report indicates that investors believe the Fed will be reluctant to begin “normalizing” monetary policy – i.e., raising short-term interest rates off near zero – in the immediate future, possibly not before late 2015 or into next year. After the jobs report came out, bond prices jumped, sending the yield on the benchmark 10-year note down 10 bps or so to 1.82%, its lowest level in two months.
The jobs report, while certainly weaker than expected, didn’t come completely out of nowhere. The ADP national employment report that came out two days earlier proved to be a lead-in for the official government report. ADP said private-sector payrolls increased by only 189,000 in March, about 40,000 below expectations and down 25,000 from the prior month.
Why are employers suddenly cutting back on hiring after the recent spate of adding more employees? Because economic growth isn’t sufficient to convince them to keep hiring, or at least they want to see more evidence of sustained growth before they make the investment in more workers.
While the March payrolls number undershot the Street forecast by about half, it really shouldn’t have come as that big a surprise – a shock, maybe, but not a surprise. In fact, the U.S. economy has been growing feebly since late last year. Harsh winter weather in February and March may have made things worse recently, but we can’t blame this one on the weather like we did a year ago. Nor can we blame it on a weak dollar and lower oil prices.
The Commerce Department’s final revision of Q4 2014 GDP showed annualized growth of 2.2%. That’s down from Q3’s 2.7% rate and the lowest rate in a year. The report also showed Q4 corporate profits falling at a 3% pace from the prior quarter, the largest quarterly drop in four years; on a year-over-year basis, profits rose only 2.9%, down from the prior quarter’s 5.1% rate. Can we blame what happened in November and December on bad weather in February and March?
That weakness has carried over into the first quarter of this year. The Chicago Fed’s national activity index was in negative territory the first two months of this year. The ISM’s manufacturing index fell to 51.5 in March, its fifth straight decline and the slowest pace in nearly two years. The important new orders component fell to 51.8, its lowest reading since April 2013.
Construction spending is down two months in a row. Yadda, yadda, yadda.
And where’s the consumer spending bounce we’re supposed to get from lower oil prices? Retail sales have fallen three straight months. The declines in December and January were due to lower gasoline prices, which reduced spending for sure, but sales were down again in February even though gas prices jumped. Consumer spending, a broader measure than retail sales, rose a scant 0.1% in February after falling 0.2% in each of the previous two months.
Should this trend continue into the second quarter as the winter ends I just do not see how the Fed will have the cajones to move forward with a rate increase in the foreseeable future, possibly not anytime this year.
Following its March FOMC meeting, the Fed did indeed drop the word “patient” from its monetary policy statement, but as Fed Chair Janet Yellen noted almost immediately, that was largely just semantics (or the lack of same). “Just because we removed the word patient from the statement doesn't mean we are going to be impatient,” she said in her post-meeting remarks, which caused the stock and bond markets to rally on the belief that there would be no rate hikes for at least several more months.
Speaking at a conference at the San Francisco Fed about a week later, Yellen said she expected that economic conditions “may warrant an increase in the federal funds target sometime this year,” although “the appropriate time has not yet arrived.” Indeed. After Friday’s jobs report, my guess is that time won’t arrive until 2016.
We all know how deliberate the Fed moves. And Yellen and other Fed officials have said all along that monetary policy decisions will be “data driven.” Well, the data so far this year is saying no rate increase in 2015.
Visit back to read my next article!
George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
I'm not quite as bearish as Frank, but agree in that I certainly don't see a hike this year. The data is ambiguous at the moment and the threat of deflation is still very much a reality. Fed can't raise rates in these conditions. A deflationary environment makes monetary policy somewhat muted.
Have to agree with Frank. According to P. Schiff, the Fed may have to raise rates sometime - but not because of a strong economy, but a bad one. He speculated that Q4 is coming, and will implode. Following that, the dollar will tank, and the Fed will raise rates to try to keep the ship from sinking. It will be interesting to see if he turns out to be right.
At the moment it does look like the US economy is contracting, but we'll see. This was just one really bad month, are the next two months going to be much better?
I remember way back in 2012 when the experts and economists expected the Fed to start increasing rates. Then it was pushed into 2013. Then it was pushed into 2014. Then it was pushed into 2015. Now, it appears not until 2016. Hey! Times-up! How about never? These same experts and economists should be fired and file for unemployment and go eat crow looking for real job!. We should instead be preparing for the opposite...the Fed could lower rates into the negative, especially when the next Recession or worse hits us. Pretty soon we will be closing out our savings accounts and money market accounts, because otherwise we'll be paying interest to keep our accounts open. It's already happening to countries overseas. Sad. The system is slowly, quietly unravelling, losing its credibility, and drowning in debt, running out of worthless paper. Its been 6 years now since the so-called Great Recession. What makes anybody think that all of the sudden things are now going to get better? Hey Fed! News Flash: Your policies are not working! You are too scared to raise rates. You are just buying time and delaying the inevitable. Ben Bernanke was a smart guy...because he knew when to leave and not re-up for another term! He knows what's coming down the pike! The Fed is caught between a rock and hard place! This so-called Recovery streak that has been dragging along is due to be broken. When that time comes...it won't be pretty...it will make the Great Recession look like gravy!
Spot on 🙂
The problem with this article is that the ADP report is designed to forecast the government unemployment report of two days later. It's redundant to use the ADP as a supporting fact. There is more data within the BLS employment report that would tend to indicate the seasonal adjustments would start to reduce the headline figures going foward, but that would assume that the divergences in the report would only be corrected by the establishment survey. The real underlying monthly employment trend is roughly 210K. There's been very little difference made by the presence or absence of QE or by ZIRP for that matter. An inherent flaw in comparing economic stats with monetary policy on a monthly basis is that the former is heavily massaged by seasonality.