So-So Job Growth Could Prove Enough To Prompt QE Cuts
Another month of lukewarm job growth eased fears of an imminent pullback in monetary stimulus, but the pace of improvement could still be enough for central bankers to taper bond buying in a few months.
Nonfarm payrolls expanded by 175,000 in May, the Labor Department said Friday, edging past forecasts of 167,000, though April's gain was downwardly revised to 149,000.
A separate household survey showed the unemployment rate rose to 7.6% from 7.5%, as more people entered the workforce. The participation rate edged up to 63.4% from 63.3% but is still at 1979 levels.
U.S. stock indexes rallied strongly, as the payroll gain stayed below the 200,000 mark that some Federal Reserve officials said they'd like to see before trimming monthly bond buys of $85 billion.
But Fed policymakers also have tied QE to more qualitative thresholds like "substantial" improvement in the labor market outlook vs. quantitative targets, noted Eric Green, global head of rates and currency research at TD Securities.
Central bankers want the participation rate to stabilize and the labor force to grow as well, he added. The May employment numbers, if sustained, could be enough to achieve those goals.
"If they see this report three to four more times, they will have confidence this (improvement) will continue," he said, predicting the first pullback in stimulus will come in September.
By then, the Fed could shave $10 billion-$15 billion off monthly asset purchases at each meeting, possibly cutting more later, until QE stops by the end of Q1, Green said.
The amount of job creation needed to keep unemployment stable is seen smaller than it was in previous decades, given slower population growth and lower labor participation.
A recent paper from the Chicago Fed estimated that 80,000 a month is OK, meaning the latest increase is more significant than historical trends suggest.
But the types of jobs added in May were less encouraging. The biggest hiring gains were in lower-wage sectors like leisure and hospitality (43,000) and retail (27,700).
Temporary employment grew by 25,600 to a record high. While that category was once seen as foreshadowing permanent hiring, temps are now seen as a way for employers to avoid ObamaCare costs.
Manufacturers shed 8,000 jobs, the third straight month of declines. Construction firms added 7,000, well below advances during the fall and winter.
The employment-to-population ratio was 58.6%, unchanged from April and a year ago.
Still, many analysts said the latest job data appear good enough to spur QE reductions later this year. If subsequent reports look like May's, the first cut should take place in October, said Tom Porcelli, chief U.S. economist at RBC Capital, in a research note.
"The hurdle is not that high," he wrote. "We think simply avoiding deterioration will be enough to usher in tapering, eventually."
