A funny thing happened on the way to the mid-cycle slowdown. The slowdown wasn’t quite as slow as some in the Federal Reserve expected. That at least has been the new new thinking this week, courtesy of the surprisingly strong rise in GDP for the fourth quarter, as we discussed in our previous post.
Into the mix comes this morning’s employment report for December. Nonfarm payroll rose by 111,000 last month, the smallest rise since last May’s 103,000 increase. Is it time to rethink the economic growth story that seemed to bloom anew? No, at least not yet.
January’s rise in nonfarm jobs works out to a 0.08% rise over the previous month. That’s on the low end in recent history, but still within the band of growth posted in 2006. Last May and October witnessed identical rates of nonfarm job increases. Previously, such relative dips in growth inspired warning that job growth was about to stall in absolute terms, to be followed by recession. It didn’t happen then, and it may not happen now.
Indeed, as our chart below reminds, the labor market doesn’t move from growth to contraction overnight. The warning signals will build over months and quarters. Consider that the deterioration in the labor market in 2000-01 was fairly rapid, unfolding over about a year or so. But the type of blatant catalyst at the time–the bursting of the tech bubble–doesn’t offend in the here and now. Corporate profits are high, consumers are spending, the labor market’s growing, and investors are far more cautious. A recession may be coming, but now’s not the time to hold one’s proverbial breath.

A year ago, in January 2006, total nonfarm payrolls totaled 135.11 million. Last month, nonfarm payrolls reached 137.26 million, or a gain of a bit over 2 million. In percentage terms, nonfarm payrolls climbed by 1.6% over the year-earlier month. Yes, that’s the slowest pace since mid-2005. But given the strong GDP number for the fourth quarter, and the continued strength in consumer spending (the government yesterday reported that consumer purchases in December rose by the most in five months), there’s a fair amount of momentum in the economy. Add to that all the liquidity that’s still sloshing around, and the Fed’s willingness to let interest rates ride, and you’ve got a nice blend of factors suggesting that growth will remain the path of least resistance for the next quarter or two. In turn, that should keep the stock market bubbling and bonds on the defensive.
Keep in mind that the last several months have been a test or sorts for the economy. The fallout in housing, we were told, was supposed to derail the economy. It’s looking increasingly clear that the real estate train wreck was more of a speed bump. If real estate couldn’t produce a recession, what could? Yes, there’s always something lurking that could potentially create havoc. But for the moment, there’s no obvious catalyst for disaster.
Nonetheless, there’s still enough doubt out there about what’s coming to keep traders wondering. Fed funds futures contracts are currently priced in anticipation that the current 5.25% Fed funds rate will remain unchanged through August. Fence sitting is in vogue at the Fed and around the financial markets, with a bit of pessimistic icing on the edges. “The overall economy is weak and it’s far too early to discount the possibility of rate cuts this year,” Richard Iley, an economist at BNP PARIBAS in New York, told Reuters yesterday.
Stock markets are said to climb walls of worry. The next several months offer plenty of opportunity to put that notion to the test.


  1. theroxylandr

    At the day one of the last recession in early 2001 the unemployment was even lower than it is today. And it’s usually the case.
    So if anyone is looking for unemployment rate to indicate the health of the economy, he should not. The next recession will start with unemployment in 4.5% area, like now.
    It’s a trailing indicator.

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