Beyond the Noise, More of the Same?

Delayed economic data reports have begun to arrive. The figures point to a disappointing 3Q13 (relative to expectations) and the partial government shutdown is unlikely to help in 4Q13. The recovery had been poised for improvement this year, but fiscal policy has been a major headwind. Economic figures will be distorted in October (due to the government shutdown) and in November (due to the rebound from the shutdown). Yet, beyond the noise, the underlying pace of growth is likely to remain disappointing in the near term. Is there hope for 2014?

The September employment figures were a bit disappointing, but hardly a disaster. The economy added 612,000 jobs before seasonal adjustment. Education (public and private) added 1.476 million (vs. +1.436 million in September 2012), while non-education jobs fell by 864,000 (-815,000 last year) reflecting the end of the summer. So it seems a little silly to worry about the nearest 20,000 or so in the adjusted payroll number. Moreover, the adjusted monthly payroll figure is reported accurate to ±90,000 and these data will be revised (and revised again). At +129,000, the average monthly pace of private-sector payroll growth in 3Q13 was slower than in the first half of the year, but that’s not weak. It’s consistent with the pace of growth in the working-age population (enough to keep the unemployment rate steady over time). The pace would be just fine if we were at full employment, but we’re not. The problem is that we’ve got a lot of ground to make up in the labor market.

The unemployment rate edged down again in September, now at 7.2%, the lowest since November 2008. Most of the decline in the unemployment rate over the last few years has been due to decreased labor force participation. Some of that, perhaps a quarter, is demographic (the aging of the population). However, many of the long-term unemployed have given up looking for a job and are no longer officially counted as “unemployed” (to be counted as “unemployed,” one has to be actively looking for a job). The unemployment rate is now closing in on 7%, a level that (back in June) Fed Chairman Bernanke had suggested would be consistent with an end to the Fed asset purchase program (QE3). However, at his press conference following the Fed policy meeting in mid-September, Bernanke backed away from that view.

Other labor market indicators have remained consistent with a gradual pace of improvement in labor market conditions. In a speech several months ago, Fed Vice Chair (and current nominee to replace Bernanke as Fed chairman) Yellen indicated that she was following hiring and quit rates. In a strong labor market, workers are more likely to quit, believing that they can easily find a new job. When the labor market is weak, you tend to see less of this. The quit rate for the private sector edged up in August, but remained low by historical standards. The hiring rate was flat. That suggests that we’re still a long way from a full recovery in the labor market, but you knew that already.

The October employment figures will arrive on November 8 (not that far away) and should show a dramatic loss in overall payrolls due to the government shutdown. The payroll survey covers the pay period that includes the 12thof the month. Some 800,000 furloughed federal workers were out October 1 through October 17, which means that they won’t be counted in the payroll total. In addition, private-sector contractors to the government laid off some workers due to the shutdown, and other firms were generally less likely to hire due to the uncertainty from Washington. These “lost” jobs should return in the report for November (due December 6).

Some have suggested that the continued uncertainty regarding the federal budget and debt ceiling will prevent the Fed from tapering this year. However, while another government shutdown is possible, it’s unlikely. The budget authority will expire in mid-January. The debt ceiling has been suspended through February 7, but the Treasury should still be able to borrow for a few weeks (if not months) after that. The deficit reduction committee will meet this Wednesday. Lawmakers may be unlikely to reach a grand bargain on the long-term budget situation by early January, but they should be able to agree to kick the problem down the road for a while.

Efforts to reduce the deficit have been well intended, but tighter fiscal policy in a gradual economic recovery is contractionary. The nonpartisan Congressional Budget Office (as well as a number of private forecasters) estimates that the increase in the payroll tax and the sequester cuts subtracted a point and a half or more from GDP growth this year. That has been the economy’s most significant headwind this year. The government shutdown likely subtracted from growth as well.

Another round of sequester cuts is set for mid-January. These cuts have been unpopular with both parties, but the two sides have not been able to come together to do anything about it. If the sequester cuts go through, GDP growth in 2014 should be a few percentage points lower than it would be otherwise.

The economic recovery is now more than four years old. In the early part of the recovery, housing and a major contraction in state and local government were substantial headwinds. These are no longer slowing growth, but federal fiscal policy has been a more significant drag this year. What’s in store for 2014? We should see improvement in the global economy. Fiscal policy may be a further drag, but surely a lot less than in 2013. Monetary policy will remain accommodative, but the Fed has a challenge in how it communicates the decision to taper.

© Raymond James

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