“Unemployment falls to 5-year low.” It’s an instant headline, and rightfully so.
Investors are looking at the unemployment rate, which fell to 7 percent in November, as a predictor of the Federal Reserve’s behavior at its meeting Dec. 17 and 18. At the meeting, the Fed will decide whether or not to taper its bond-buying program.
How will the Fed react? “It’ll be a close call,” Moody’s Analytics economist Nate Kelley said in an email. And the yield on the benchmark 10-year Treasury bond could shift too. “Many bond holders will likely want to get out ahead of the pack, which would put upward pressure on the 10-year Treasury yield.”
Near the end of the trading day, the 10-year Treasury yield was down a basis point after rising Thursday to 2.87 percent, the highest yield since Sept. 17. The Dow Jones Industrial Average was up more than 1 percent to reclaim the 16,000 level.
Since September 2012, the Fed has spent $85 billion a month buying Treasury bonds and mortgage securities. The idea is that the spending will spur growth and keep interest rates low. The program is temporary, and the Fed plans to taper the stimulus once the recovery gains enough steam. At its most recent meeting in October, the Fed decided to continue the program as is, waiting for better evidence of a sustainable economic recovery.
The low unemployment rate is the latest in a string of numbers that hint at the kind of recovery the Fed is hoping for. Employers added 203,000 new nonfarm payroll jobs in November. Third-quarter economic growth was revised upward to 3.6 percent and initial jobless claims last week were the lowest since early September, according to reports out Thursday.
With every headline-grabbing statistic, though, there is a caveat. The economy’s growth in the summer months was largely due to an inventory build-up, which is not a predictor of a sustained recovery. It’s hard to tell whether jobless claims are being inflated by temporary holiday hiring. And while the overall unemployment rate fell, the labor force participation rate is still dismal.
The labor force participation rate measures everyone 16 or older who either has a job or is looking for one as a percentage of the entire civilian population. Those not participating in the labor force include students, people who are retired and people who have given up looking for a job. The rate was above 66 percent from the early 1990s to the mid-2000s. In November, it was 63 percent, the second-lowest monthly rate (behind October’s 62.8 percent) since 1978.
Of the 10.9 million unemployed Americans actively looking for work, nearly 4.1 million, or 37.3 percent, have been unemployed for 27 weeks or more. While long-term unemployment has descended from the 6-million-plus figure seen in 2010, it rarely spiked above 2 million before the recession.
Whether the Fed decides to taper depends on how it interprets the numbers.
“The Fed urgently wants to pivot,” Diane Swonk, chief economist at Mesirow Financial, wrote. “Today’s report, coupled with the increasing likelihood of a two-year budget agreement, will allow the Fed to meet the preconditions it set to start tapering its asset purchases.”
Robert Dye, chief economist at Comerica Bank, put the odds that the Fed will taper in December at 33 percent.
“The last, and still absent, green light for (quantitative easing) tapering is a federal budget deal that extends the debt ceiling and removes the threat of a rating downgrade,” he wrote.