Jobs report: A green-light for Fed tapering?
Unemployment falls to a five-year low of 7%; construction jobs tick up
The U.S. unemployment rate fell to a five-year low of 7% in the most recent government report, prompting market analysts to predict a tapering decision from the Fed on the purchase of mortgage bonds and Treasurys as early as this month.
Department of Labor data shows the U.S. unemployment rate falling from 7.3% to 7% as the economy added 203,000 jobs during the month of November.
Whether it’s enough to symbolize a real recovery is irrelevant. Either way, the market has been waiting for unemployment to drop enough to prompt a tapering of the Fed’s aggressive purchases of mortgage-backed securities and Treasurys each month.
The benchmark unemployment goal for tapering has been set by the Fed at 6.5%. However, the Fed indicated in its latest FOMC minutes update that there is no exact threshold that will magically inform its decision. Instead, the Fed will make its decision based on what it believes the market needs.
Analysts believe Friday’s job report gave the Fed exactly what is required to move forward with some tapering of asset purchases.
"The 203,000 increase in November's non-farm payrolls, along with the drop in the unemployment rate to a five-year low of 7.0%, gives the Fed all the evidence it needs to begin tapering its asset purchases at the next FOMC meeting later this month," Capital Economics noted.
Even the federal housing agencies are seeing this as a tell-tale sign of a coming taper.
"The report highlights the resiliency of the private sector amid headwinds and should green-light the Federal Reserve to start tapering its asset purchases in March as we anticipated, assuming orderly outcomes over the government funding and debt ceiling issues," said Doug Duncan, chief economist for Fannie Mae. "Contentious fiscal events in October and lingering unresolved issues appear to have tempered consumer expectations regarding the housing market."
And even though job numbers are showing signs of improvement, there are potential headwinds surfacing in the housing market.
"Our November National Housing Survey, to be released next week, is expected to show continued caution among consumers with regard to home price expectations as well as on home buying and selling conditions," Duncan wrote.
Jed Kolko, chief economist for Trulia, praised the report after it showed young adults coming back into the job market. Young adults are a barometer for financial strength in the first-time home buyer segment.
"Hooray: more young adults went back to work. Employment among 25-34 year-olds, the prime age group for housing demand, rose to 75.2% in November, above the 75% level from September," Kolko said. “The October dip to 74.6% was probably due to the government shutdown. Still, the longer-term trend is discouraging: the employment rate of 75.2% in November was closer to the low point during the recession (73-74%) than to the pre-bubble normal (78-80%)."
Growth in residential construction also is apparent in Trulia’s latest report, with Kolko noting that residential construction jobs increased 5% year-over-year. Still, construction employment remains 37% below bubble-era levels.