Policymakers,
Pundits, and Politicians Eye the May Jobs Report
The
May jobs report is due out on Friday June 1, 2012, and as always, market
participants and policymakers will closely watch the report. This year is an
election year, of course, so the politicians and political pundits will have
plenty to say about the report as well.
Market
participants are looking for an increase of 160,000 private sector jobs in May
2012, a slight acceleration from the 130,000 jobs created in April 2012, but
well below the 250,000 per month pace of job creation seen between December
2011 and February 2012, which was likely inflated by much warmer-than-usual
weather during those months. The 130,000 private sector jobs added in April
2012 were the fewest in any month since August 2011 (52,000), and most likely
represented the final month of “payback” for the warmer-than-usual winter
weather that likely inflated the payroll count between November 2011 and
February 2012. Last fall, prior to the warmer weather, the economy was creating
around 150,000 jobs per month. The true pace of underlying job growth is likely
somewhere between 150,000 and 250,000. In our estimation the true pace of
employment growth is in the 175,000 to 200,000 range.
Compared
to last fall, when the level of initial claims for unemployment insurance was
running over 400,000 per week, the level of initial claims filed each week in
May 2012 (under 375,000 per week) suggests that hiring is a bit more robust
today than it was last fall. Several other indicators suggest that the economy
is probably creating more jobs than it was last fall (150,000 per month), but
not many more:
·
The
increase in consumer sentiment,
·
The
better consumer spending in recent months,
·
The
near-record level of corporate profits and cash flows,
·
The
increase in job openings, and
·
The
number of job quitters as a percent of overall job separations.
Policymakers
at the Federal Reserve (Fed) also will likely have a keen interest in the May
jobs report, which will be the last one prior to the key June 19 – 20 Federal
Open Market Committee (FOMC) meeting.
·
If
the economy is creating closer to 100,000 jobs per month in the coming months,
the Fed is more likely to act to replace “Operation Twist” with some other type
of monetary stimulus (QE3) when it ends at the end of June.
·
If,
however, the economy is creating around 150,000 jobs per month, it is likely to
be a close call whether the Fed announces a new stimulus program.
·
Based
on Fed Chairman Ben Bernanke’s statements, job gains over 200,000 or so might
see the Fed hold off on more stimulus, although events in Europe or the
upcoming fiscal cliff here in the United States might force the Fed‘s hand.
A
quick review of Fed Chairman Bernanke’s most recent comments on the labor
market may be a helpful guide on this topic. Other than a speech on bank
regulation on May 10, 2012, Bernanke has not spoken publicly since his press
conference following the April 25 FOMC meeting. And as this publication is being
prepared, he is not scheduled to speak again until his press conference after
the June 19 – 20 FOMC meeting.
In
that April 25 press conference, Bernanke noted that the economy needs to
generate around 100,000 or so jobs per month to keep the unemployment rate,
currently at 8.1%, steady. He went on to say that the economy needs to generate
between 150,000 and 200,000 jobs per month to achieve the Fed’s forecast of
lowering the unemployment rate to under 8.0% by the end of 2012. Bernanke said
that because of the warmer weather and an unusually strong labor market in the
final few months of 2011 and in early 2012, he expected that jobs gains in the
months ahead “will be somewhat less than the 250,000 a month that we’ve been
seeing recently.” He also said that “we’ll continue to be watching the labor
market. That’s a very important consideration. If unemployment looks like it’s
no longer making progress, that’ll be an important consideration in thinking
about policy options.”
Politicians
and pundits will also likely pick apart the May jobs report, although another
five jobs reports will be released before the general election on November 6,
2012. When President Obama took office in January 2009, the unemployment rate
was 7.8% and rising, hitting a peak of 10.0% in October 2009, four months after
the end of the recession.
At
the beginning of the 2007 – 2009 Great Recession, the unemployment rate was
5.0%; the rate hit a cycle low of 4.4% in late 2006 and early 2007.
The
unemployment rate is currently at 8.1% and still above where it was (7.8%) when
President Obama took office. Looking ahead, the Bloomberg consensus says that
the unemployment rate will average 8.0% in the fourth quarter of 2012, little
changed from where it is today. In fact, only four of the 64 economists
recently surveyed by Bloomberg think the unemployment rate will be lower in the
fourth quarter than it was when President Obama took office. How the
unemployment rate performed during the past 10 presidential elections (1972 –
2008) provides plenty of history from which to draw comparisons.
Comparing
the unemployment rate in October of each election year since 1972 to the
unemployment rate in January of the first year of the first term, we find that
in five election cycles the unemployment rate was the same or lower in October
of the election year versus where it stood at the start of the term. Those
elections were:
·
1980
·
1984
·
1988
·
1996
·
2000
In
three of those five elections (1984, 1988, and 1996) the incumbent was
reelected. In the other five elections since 1972, the unemployment rate in
October of the election year was higher than it was when the presidential term
began. The incumbent party was reelected in two of those five elections: 1972
and 2004. Thus, if the last 10 election cycles are any guide, the President's
chances of re-election would increase if the unemployment rate is at 7.8% or
lower by October of this year.
Among
economic indicators, while the unemployment rate is politically important, and
garners a great deal of attention in the media, real after-tax personal income
is probably a better economic indicator to rely on to help determine election
outcomes. As noted in the April 2, 2012 Weekly Market Commentary, the impact of
the economy on the election can most clearly be seen through the relationship
between income growth in the year leading up to the election and election
results. Inflation-adjusted, after-tax income growth of about 3 – 4% appears to
be the threshold for incumbents to get 50% of the popular vote. This measure of
per capita income, contained in the most recent (March 2012) Personal Income
and spending report, is only growing at 0.6%.
___________________________________________
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are
not intended to provide specific advice or recommendations for any individual.
To determine which investment(s) may be appropriate for you, consult your
financial advisor prior to investing. All performance reference is historical
and is no guarantee of future results. All indices are unmanaged and cannot be
invested into directly.
The economic
forecasts set forth in the presentation may not develop as predicted and there
can be no guarantee that strategies promoted will be successful.
The fast price swings
in commodities and currencies will result in significant volatility in an
investor's holdings.
The Consumer Price
Index (CPI) is a measure of the average change over time in the prices paid by
urban consumers for a market basket of consumer goods and services.
Quantitative Easing
is a government monetary policy occasionally used to increase the money supply
by buying government securities or other securities from the market.
Quantitative easing increases the money supply by flooding financial
institutions with capital in an effort to promote increased lending and
liquidity. This research material has been prepared by LPL Financial.
The Federal Open
Market Committee action known as Operation Twist began in 1961. The intent was
to flatten the yield curve in order to promote capital inflows and strengthen
the dollar. The Fed utilized open market operations to shorten the maturity of
public debt in the open market. The action has subsequently been reexamined in
isolation and found to have been more effective than originally thought. As a
result of this reappraisal, similar action has been suggested as an alternative
to quantitative easing by central banks.
This research
material has been prepared by LPL Financial.
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