Another surprisingly good economic stat came out today: Employment increased by 203,000 for November, higher than the expected 185,000. Unemployment decreased to 7 percent for the headline U-3 number, while the underemployment rate, the U-6, decreased by a full 0.6 percent to 13.2 percent.
These are big improvements. The jobs number, along with October’s gain, is the best since earlier this year. The improvement in the unemployment numbers, which are based on a different data series, provides important context and support. An increase in the household measure of employment of 818,000 more than reversed the 735,000 decline in the prior month from the government shutdown, and the participation rate actually increased as well, to 63 percent from 62.8 percent, suggesting the gain wasn’t due to people leaving the labor force.
Digging down a bit, the details were even more encouraging. Hours worked increased, meaning total labor demand grew even more robustly than the strong jobs figure suggests. Private job growth dropped slightly from last month—but remained strong—while government job growth moved into positive territory for about the first time in years. We’ve talked before about government being a drag on employment and the economy, and, with the recovery in tax receipts, this is a major indicator that is reversing.
All in all, as I discussed yesterday, such good signs for the economy might tip the Fed to start the tapering process—that is, reducing the amount of bonds it buys—in December. The Fed, and Janet Yellen in particular, have focused very closely on employment. The strong gains in jobs, the reduction in the underemployment rate, and the uptick in the participation rate all provide sufficient justification to start now.
I believe one of the principal factors that prevented the Fed from tapering in September was worry about the debt ceiling and budget confrontations that were then pending. While that might still work to delay the taper this month, the signs are actually good that a budget deal may be in the works. Front-page articles in both the Wall Street Journal and New York Times today have reasonably detailed outlines of what the deal looks like: a compromise on spending—higher than Republicans would like but lower than Democrats hoped for—and a package of spending cuts and revenue enhancements that would allow both parties to avoid the next round of sequester spending cuts.
Both parties have significant incentives to strike a deal this time, so, although there are obstacles, they look surmountable. While the Fed could use politics as an excuse to delay tapering, it would be a weak one.
Given the strong and accelerating recovery, I believe the Fed should start tapering in December. The decision not to do so in September shocked the markets and, in my opinion, was overall counterproductive, creating unnecessary uncertainty. While there were arguable reasons to delay then, there aren’t now.
Interestingly, the markets seem to agree. In yesterday’s post, I noted that stock markets didn’t seem too cheerful about the improvements in the economy. This morning’s results, after the actual data, seem considerably more optimistic. It could be a classic case of selling the rumor and buying the news, but, for today at least, the markets see a bright future ahead.