Tomorrow Federal Reserve Chairman Janet Yellen is set to deliver a monetary policy update to the House – her first semi-annual monetary policy testimony - and she will certainly have plenty to talk about from the disappointing January employment report and the growing fear the new health care law will exacerbate long-term joblessness* to the future of tapering and the Fed’s exit strategy.
*Recently, the CBO (Congressional Budget Office) released a report suggesting the Affordable Care Act will reduce full-time employment over the next ten years by the equivalent of about 2 million jobs. Most of the disemployment projected is expected to be voluntary - those that choose to drop out of the labor force because they no longer need to keep their job to keep their health insurance. Some economists argue this is a good thing - people who find that they can still get health insurance outside of their job for less money may leave and do something else which for some will be returning home to take care of the kids, for others early retirement or still others an alternative job or innovative path. Other analysts just as strongly argue that while on the margin there may be some long-term benefit from eroding the "job lock," on net, however, as the participation rate remains at a near three decade low, the expectation of further erosion to the country’s workforce will only further undermine productivity, competitiveness as well as macro-growth opportunities.
Following Friday’s disappointing January employment report, stocks initially sold off more than 100 points but ended the week in the black after three straight weekly declines; the market chose to focus on the not-so-bad portions of the report including a gain in goods-producing payrolls and an organic decline in the unemployment rate.
When it comes to monetary policy, committee members will no doubt be looking to February’s employment report with increased scrutiny to determine the appropriate pathway for rolling back stimulus as officials attempt to differentiate between temporary weakness and underlying fundamental weakness - October and November’s outsized +200k monthly employment gains suggesting momentum in the labor market was more than undercut by December and January’s combined rise of less than 200k, a minimal increase that cannot be explained away by weather influence alone.
Bernanke initiated the tapering process back in December based on improvement already seen in hiring and more importantly the expectation of further improvement in coming months. Yellen appears more inclined to wait for economic strength to come to fruition rather than continue to adjust policy based on expectations alone. Should February’s employment report fall short – less than
100k – it is increasingly likely the new chairman pushes to pause reductions in monthly bond purchases, or in other words taper the taper.
This week’s big news, aside from Yellen speaking on Tuesday, is the January retail sales report released Thursday. According to Bloomberg, January headline sales are expected to remain unchanged in January and rise 0.1% excluding autos.
Weather has been blamed for a lot this month – from the employment report to the decline in the ISM (Institute for Supply Management) - and certainly arctic winter temperatures can deter shoppers from going out and spending, so the market is more likely than not to shrug off consumer weakness this month as a temporary setback. But this will put increased pressure on February’s report – like the employment report - to give a clean look at the momentum or lack thereof in the consumer sector.
-Lindsey Piegza Lindsey M. Piegza, Chief Economist (312) 924-0607 [email protected]
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Appendix Section, Page I February 10, 2014