Do these data surprise the Fed?

By Thomas Cooley and Peter Rupert

Today’s release of the employment situation shows a modest increase in employment of 142,000. Moreover, employment over the past two months was revised down by a total of 59,000 (22,000 for July and 37,000 for August). While the mining and logging sector (oil) continued to shed jobs, manufacturing employment was down for the second month in a row; falling 9,000 in September after falling by 18,000 in August. Although the housing sector has shown some growth, construction employment is still lagging. Average weekly hours also fell back to 34.5.

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The household survey also had a weak flavor to it. The unemployment rate stayed at 5.1%, but the labor force fell by 350,000. The employment to population ratio also fell to 59.2.

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Last week, the third “estimate” of real GDP for the 2nd quarter of 2015 shows  that output of final goods and services grew by 3.9% at an annual rate compared to 3.7% from the 2nd estimate. There was no change in the final estimate of 1st quarter GDP, remaining at 0.6%.  Personal consumption expenditures (PCE) was the largest contributor, providing 2.42 percentage points of the 3.9% gain.

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Chairperson Yellen’s remarks on September 24 mentions again that they could (expect to?) raise rates by the end of the year:

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

The last sentence in the Yellen quote once again provides an out for the Fed not to do anything. It is the nature of the beast that quarterly or monthly outcomes can be much different from the trend without signaling a change in direction. That is, if in the next employment report there is a slight uptick in the unemployment rate, or an employment change of say only 100k workers, will that dissuade members of the committee? There is (almost) always something in a given report, GDP or employment, that can be read as surprising. Perhaps non-residential investment is particularly low, for example. Here are the numbers for the annualized percentage change in non-residential structures over the past six quarters, i.e., starting in 2014Q1: 19.1%, -0.2%, -1.9%, 4.3%, -7.4%, 6.2%. And this for equipment over the same time period: 3.5%, 6.5%, 16.4%, -4.9%, 2.3%, 0.3%.

The bigger question is whether the economy is in a sustained recovery or have we hit a rocky spot giving the Fed further pause? That said, a return to normal monetary policy that begins to eliminate some of the distortions caused by several years of zero interest rates would seem to be beneficial and it is surprising that the FOMC did not see it that way.

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