On Friday, the BLS reported job growth of 160,000, which was about 40,000 below consensus estimates. Although this is only one month of data in a highly volatile statistical series, it could have profound consequences for Fed policy. For the last year, Fed statements and speeches have used the low unemployment rate as partial justification for rate increases. Now with one month of weaker data, it’s possible a hawkish consensus will give way to more dovishness, postponing further rate increases until at least the end of the summer.
The following sentences from the latest FOMC statement are indicative of the Fed’s interpretation regarding the jobs market:
A range of recent indicators, including strong job gains, points to additional strengthening of the labor market.
The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.
Data from the latest jobs report may contradict the Fed’s rosy assessment. Due to weakness in retail and construction jobs, the headline number was 160,000. Previous months were revised slightly lower. And the labor force participation rate – which had recently been increasing -- decreased .2%. It’s important to remember this in only one report, meaning it could merely be a statistical anomaly. But its timing – coming right on the heels of a very weak 1st quarter GDP number -- could make all the difference.
On May 4th, St. Louis Fed President Bullard gave an interview to the New York Times, where the following exchange occurred:
Bullard later notes low productivity growth explains the weak GDP -- strong employment divergence: to increase output, companies most hire a larger number of employees. Had Friday’s report been stronger, Bullard would clearly be in the hawkish camp. But the weaker print may lead Bullard to conclude that weaker GDP growth is in fact the correct way to look at the US economy, forcing him into the dovish camp.
Atlanta Fed President Lockhart has a similar analytical data approach as Bullard. Lockhart made the following statement in a speech this week:
Here's a key point in assessing the current situation: the tone of reports on our two objectives—the encouraging employment and even inflation data—isn't easily reconciled with the current growth picture. As a policymaker, I've got to form an opinion on which data element is the most reliable signal of economic reality. For the time being, I'm favoring the encouraging employment data over the growth data. Our soundings of business leaders across the Southeast (a process led by our Jacksonville regional executive, Chris Oakley) are more upbeat than the recent GDP number.
Like Bullard, Lockhart will have to balance the short duration of the weaker data with its overall importance.
San Francisco Fed President Williams is in the same position:
Two or three Federal Reserve interest rate increases this year would be "reasonable," but the central bank will continue to watch economic data, San Francisco Fed President John Williams said Thursday.
"We should stay on our basic strategy of gradually reducing accommodation," he told CNBC from the sidelines of a conference on monetary policy at Stanford University's Hoover Institution.
"I'm not taking too much of a signal from the first-quarter GDP," he said.
Williams touted progress in the labor market and said concerns about a global slowdown have dissipated somewhat.
In the same interview, Williams noted that first quarter data has been weak for most of this expansion, potentially indicating an issue with the current seasonal adjustment applied to the data. However, like other Fed presidents, Williams places greater interpretive significance on certain granular data points (such as employment figures) over GDP. Now he too must determine the importance of Friday’s jobs report relative to other data.
And finally, there is new Dallas Fed President Kaplan:
“Assuming we get stronger second-quarter data in terms of consumer spending and we continue to make progress on our dual mandate, I will be advocating we take further action in June or July,” Kaplan said in an interview with The Wall Street Journal on the sidelines of a conference held at the Hoover Institution at Stanford University.
His position is similar to Bullard’s, Lockhart’s and William’s.
It’s important to remember that not all recent news is negative. The latest ISM composite readings for manufacturing and services indicate both sectors are growing. And the latest GDP report showed solid increased in residential investment. But the combination of the close proximity of the weak 1Q16 GDP number and the latest employment report could provide all the ammunition the Fed needs to further slow rate hikes in 2016.