Jobs Growth Raises Questions About GDP Forecasts, Fed
January's surprisingly strong jobs report, showing gains across a range of industries, is an encouraging sign that the employment picture may finally be picking up, and that first quarter growth forecasts may, in fact, be too low.
It also raises questions about the timing of the Federal Reserve'spledge to keep interest rates low, and whether another round of quantitative easing is even necessary.
There were 234,000 nonfarm payrollsadded in January, nearly 100,000 more than expected, and the unemployment ratecontinued to creep down to 8.3 percent from 8.5 percent. That follows the creation of a revised 203,000 payrolls in December and 157,000 in November.
"It feels like we're now closer to growth of 200,000 a month. This would suggest that unemployment through the end of the year should continue to decline," said Mark Zandi, chief economist at Moody's Economy.com. "It's not as strong as the numbers say, but I think it's real in terms of business engagement."
The strong report Friday fueled a stock market rally, a move up in the dollar, and a jump in Treasury yields, pushing the 10-year yield back toward 2 percent. The Dow, up more than 100 points, was at a 3-1/2 year high.
The jobs report, coupled with other data, also spurred speculation that first quarter GDP growth estimates of 2 percent may prove too low.
"It's jobs growth across the board. Then when you see things like today's ISM, it's confirmation of what we saw this month," said Credit Suisse economist Jonathan Basile. "When you put the two ISM reports together, you say GDP forecasts are probably too low."
The ISM nonmanufacturing index, also reported Friday, rose to a surprising 56.8, from 53, the highest level since February. Employment in the report rose to a six-year high of 57.4 from 49.8, the highest level in six years. Earlier in the week, ISM manufacturing data also showed continued economic expansion at 54.1.
Traders also questioned whether the Fed will wait until late 2014to raise its target rate, as it has forecast. They also wonder whether the central bank will pursue another round of quantitative easing, which would be aimed at the mortgage market.
The Fed funds futures for the spring of 2014 moved about 5 bps, signaling that traders believe there's about a 25 percent chance that the Fed will raise rates above its 0.25 target in the first half of 2014.
J.P. Morgan economists said they now see a one in three chance of another round of quantitative easing. They note that the Fed's forecasts centered around an 8.35 percent unemployment rate for the fourth quarter of this year, and the rate has already beat their central tendency.
"I think the important point about today's data is it's going to lead to good numbers for other rest of the month, whether its things like retail sales or construction spending. For the last years, we've had a good Q4 followed by a disappointing Q1. Maybe that patterns broken," said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman.
One negative in the report was a continued labor force participation rate at 63.7 percent. The number of people employed part time for economic reasons was 8.2 million and the number of people who had stopped looking for work was 2.8 million.
But the household survey, which is separate from the survey of business and government payrolls, showed an increase of more than 631,000, after an adjustment for population control. Economists say that number, which has been higher for than the nonfarm number for the past several months, may signal job growth that's not yet recorded in the other survey.
Mesirow Financial Chief Economist Diane Swonk said it may be a signal of small business formation.
"We’re starting to see it under-the-radar, and that’s exactly what you’d expect to see,” said Swonk. For one, “The quit rate started to pick up.. and people don’t do that unless they have another job. It’s a little bit of a silver lining in what’s still a very dark cloud.”
Zandi agrees that small business and startups may be adding more employment. He said the last official government data on hiring by business size was released a year ago, and at the time, companies with more than 1,000 employees were leading hiring and small businesses were lagging.
“I sense that small business growth is picking up, and that would be consistent with the household data,” said Zandi.
The household survey is a sample survey based on data from households versus the nonfarm payrolls, based on payroll data from businesses and government agencies. Since August, the household survey has averaged job increases of about 268,000 per month, outpacing nonfarm payrolls.
Swonk said that small business creation may be showing up in those household numbers but it would still be a trickle. “We’re still talking about marginal numbers…We’re cautious because it doesn’t take much to snuff out a small business,” she said.
"The trend is finally there. We are starting to see large companies seed small companies going forward. It's small business formation," she said.
Private sector employment gained by 257,000, with 14,000 losses in the government sector. Manufacturing jobs grew by 50,000, nearly all in durable goods manufacturing.
“Manufacturing was benefiting from the energy sector and the auto sector,” said Basile.
There were another 70,000 jobs added in professional and business services, and health care grew by 31,000.
Swonk said she believes there’s a trend underway, similar to one in the 1990s, where small business development is being fostered by larger companies that are outsourcing and are reluctant to add workers to their own payrolls. She expects to see nonfarm payrolls for January of 118,000, with 127,000 additions in the private sector.
To illustrate her point, Swonk pointed to a program in Chicago where big health care companies are spurring new job growth by working with local universities and fostering business formation. The program is not new, but it highlights an important trend and one that is not just linked to the pharmaceutical industry.
Todd Smith works at a small biotech company in Chicago that has been adding workers. Smith is senior vice president of marketing and business development at Horizon Pharma, which has grown from 47 employees to 188 in the last year. He and the company’s CEO both had worked previously at Abbott Labs.
Horizon last summer raised $49.5 million in an IPO, as it prepared to launch its first drug in the U.S., DUEXIS, an osteoarthritis and rheumatoid arthritis drug, for patients with gastrointestinal sensitivity. “That’s allowed us to be one of the fortunate ones to be hiring people in this economy,” he said, adding there are a lot of good candidates available from big pharma that also have smaller startup experience.
Smith said the company is also planning to add more staff later on. It has a second drug pending FDA approval for rheumatoid arthritis, called LODOTRA, which is now being sold in Europe.
Pharmaceutical industry employment was hit hard in the recession. Industry employment peaked in 2007 at 295,000 workers, and fell by nearly 10 percent, to a trough of 269,100 in early 2011, Zandi said. It has slowly risen to 275,000, as of November and those jobs could include tiny startup biotech firms, as well as major pharma, which laid off tens of thousands of workers due to mergers and regulatory changes as well as drugs coming off patent.
“It’s one of those times in history where you have some of the best people—in spite of what they do - losing jobs,” said Smith. Smith said Horizon hopes to continue adding as it grows.
“As we continue to meet milestones, we will continue to build out,” he said.
He also said because his company is in Chicago, he did not need to move and there are plenty of professionals that can be hired locally. He said the same trend has been apparent in places like New Jersey, where biotech firms are growing up around bigger industry names.
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