The official U.S. non-farm payrolls report (NFP) released on Friday (January 10) once again showed that forecasts based on other labor market indicators are not always confirmed.
Ahead of the report, all indicators showed that this data wouldn’t be worse than the previous two reports. Thus, the ADP employment report released two days earlier showed 238,000 new jobs created. Other indicators also looked encouraging. So, the data released on Friday caused shock: the number of new jobs in December came out at only 74,000 (a three years minimum). However, this wasn’t the only surprise: despite a weak employment growth, the unemployment level (which fell to 7% last month) fell even lower and reached the level of 6.7%.
The analysts were confused. On the one hand, the report is very weak. The Fed members have repeatedly stated that a rapid decline in the Unemployment level does not reflect the real (slow) growth in the labor market. By the way, now we can clearly see that the Fed’s decision was wise (when at its last meeting, the Fed decided not to rush to raise the interest rates even when unemployment reached the target level of 6.5%). Apparently, the labor change-over, greatly affects the dynamics of this indicator. If we consider the nonfarm payrolls, the FOMC members may have reason to slow down trimming QE3.
On the other hand, we shouldn’t overestimate a single report. The Fed doesn’t adjust its policy according to every report released. Besides, this report is likely to reflect not the trends of the U.S. economy, but rather the American weather: this winter, the U.S. saw the worst record snowfalls for the last thirty years. As a result, many unemployed temporarily stopped trying to find work. More people dropped out of the workforce and the unemployment rate decreased. The employers also reduced the number of jobs, waiting for the weather to change. The American Central Bank, of course, will consider this factor on digesting the disappointing December report.
I believe that the FOMC meeting in January (at the end of the month) will result in another cut of QE3 by ten billion dollars. The Fed’s position becomes more questionable: the Federal Reserve has planned to end quantitative easing on reaching the target unemployment level of 7%. In fact, when QE is ended, the unemployment rate will be close to 6%…