Hilsenrath Analysis: Fed Likely to Stick With Policy After Robust Jobs Report

        By Jon Hilsenrath
        The Labor Department's April jobs report tells several different stories about the state of the labor market and for now likely leaves the Federal Reserve's policy settings unchanged. The stories, in brief, go like this:
        A robust upturn in job growth. Payrolls up 288,000 with upward revisions to previous months. That is the unambiguously good news in today's report. Fed officials are likely to see this as confirmation of the story they have been telling about the economy. They saw the first-quarter slowdown in growth as partly driven by unusually harsh weather and have been expecting an upturn. They are looking for faster economic growth in 2014 than in 2013 and continued improvement in the job market. The headline payroll number confirms this story, and assures officials will keep reducing their bond-buying program, which was launched in 2012 to give the economy an extra boost. They feel they need to reduce the booster fuel and this confirms that view.
        Disappointing undercurrents for households. While firms ramp up hiring, workers continue to behave in confounding ways. The jobless rate declined to 6.3%, but it was driven by continued worker exodus from the labor force--people holding or actively seeking jobs--which contracted by 806,000 individuals. This exodus is reducing counts of the unemployed and holding down the unemployment rate. The labor force participation rate--the share of adults in the labor force--tumbled to 62.8% of the working age population, from 63.2%. This included an important drop in participation among prime-age workers, between 25-54 years old. Prime-age participation had been rising since October, a hopeful sign that a stronger economy was drawing individuals back into the labor market. But most of that gain was reversed in April, falling from 81.2% of the population to 80.8%. A stronger economy should be drawing prime-age workers into the labor force, but today's report was a mark against that notion.
        Fodder for Fed debate about slack and inflation. Fed officials are deep into a debate about whether the falling jobless rate is sign of reduced labor market slack and looming inflation pressure, or whether a shadow contingent of part-time workers, long-term unemployed people and labor market dropouts will hold inflation down and warrant continued Fed efforts to spur stronger growth. Janet Yellen has come down on the latter side of this debate. Today's report amplifies the arguments but doesn't resolve them. The falling jobless rate certainly argues for less slack, putting pressure on the Fed's policy doves to justify their call for low rates far into the future. The jobless rate, at 6.3%, is already within the 6.1% to 6.3% band that the Fed forecasts for year-end. Yet while the jobless rate dropped, the number of people working part time who wanted full-time jobs increased by 54,000. And average hourly earnings were flat, a sign wage pressure is absent.
        A productivity problem. This is more evidence of an underlying productivity slowdown in the U.S. economy. More hiring plus slow economic growth equals less productive workers. That is a problem. Productivity growth is the lifeblood of rising living standards. For the Fed it presents a conundrum. Slow productivity growth suggests slack really is getting eaten up quickly. That argues for higher interest rates sooner than planned. The Fed misjudged a productivity slowdown in the 1970s and inflation took off. But low productivity growth also suggests that interest rates don't need to go very high once the Fed starts raising them. That is because low productivity is also associated with low inflation-adjusted interest rates.
        BOTTOM LINE: The Fed keeps reducing its bond purchases. The debate on the timing of interest rate increases intensifies but doesn't get resolved.
        NOTE TO FED SKEPTICS: The drop of the jobless rate to 6.3% is going to launch outcries of Fed inconsistency. From December 2012 until this past March, the Fed had been assuring the public it wouldn't consider raising interest rates as long as the jobless rate was 6.5% or above. It dropped that unemployment threshold in March. The skeptics will say the Fed had promised rate increases when joblessness dropped to 6.5% and now it is abandoning that promise. But this is simply not true. Officials all along said 6.5% wasn't a trigger for rate increases; it was a guidepost. The only thing it would trigger was discussion about when to move. Now that we're there, the discussion is engaged, but it was never a promise of action.
        (END) Dow Jones Newswires

        May 02, 2014 10:36 ET (14:36 GMT)