Surprise, surprise! The U.S. economy printed a very dismal December NFP figure but the jobless rate ticked closer to the Fed’s target. Analysts were expecting to see close to 200,000 in jobs gains but the report revealed that hiring picked up by merely 74,000, its smallest gain since January 2011.
Why did hiring slow down in December?
Poor payrolls growth was blamed on bad weather conditions, which took its toll on the construction industry. Hiring among construction companies fell by 16,000 during the month, erasing most of the 19,000 rise in payrolls last November. Employment in the manufacturing industry weakened as the sector added only 9,000 jobs, much lower compared to the 31,000 increase in the previous month.
In addition, a household survey revealed that more than 250,000 Americans weren’t at work because of the heavy snowfall when the labor survey was conducted. And who could blame them? Apparently, weather data experts concluded that December 2013 was one of the coldest months since 2009, as last month’s snowfall was 21% above normal.
Why did the jobless rate show a large improvement?
What’s particularly shocking about the latest jobs report is that, despite the disappointing gains in hiring, the unemployment rate managed to improve from 7.2% to 6.7%. That’s just a couple of notches away from the Fed’s 6.5% jobless rate threshold!
But before you start positioning for a potential rate hike though, bear in mind that the drop in jobless rate was simply a result of a decline in the participation rate. Sound familiar?
In the past few months, more and more Americans have been exiting the labor force and giving up hope in finding a job. The participation rate has fallen from 63.0% to 62.8%, marking a 35-year low. “The president’s policies are failing too many Americans, many of whom have simply stopped looking for work,” remarked Republican House Speaker John Boehner.
What does this mean for the Fed’s monetary policy?
Although the Fed previously specified that they would start considering hiking interest rates once the jobless rate falls below 6.5%, policymakers might have to rethink their target levels now that real labor market conditions aren’t being properly reflected by the jobless rate. In fact, minutes of the latest FOMC meeting showed that some officials have suggested adjustments in the unemployment rate target.
However, other policymakers are concerned about the possible impact this might have on the Fed’s credibility. Market watchers might lose faith in the Fed’s forward guidance communication strategy, a scenario that incoming Fed head Janet Yellen is keen to avoid. With that, Fed policymakers might come up with additional targets for other economic indicators before considering rate hikes. In the meantime, analysts predicted that the Fed’s recent decision to taper bond purchases will still push through.
What does this mean for the U.S. dollar?
Now that the recent jobs report has revealed that the economic recovery in the U.S. isn’t as strong as many believe, the U.S. dollar could still be very sensitive to fundamental data. If the next NFP release turns out to be another dismal one, most market participants would doubt that another taper will take place soon and possibly dump the U.S. dollar.
On the other hand, if the December NFP proves to be nothing but a weather-related glitch and hiring resumes its strong pace at the start of this year, then the U.S. dollar could regain ground in hopes of seeing a Fed rate hike sooner or later. Do you think this is a likely scenario? Let us know by voting through the poll below!