Employment Data Puts Bernanke in Difficult Position
Economists initially puzzled over why outgoing Federal Reserve Chairman Alan Greenspan mentioned increasing utilization rates as a reason for possibly continuing the Fed’s tightening campaign. However, Friday’s employment data clearly pointed to signs of the economy reaching a point where labor resources were fully utilized. An unemployment rate of 4.7% strongly signals job seekers are in a strong position to negotiate higher compensation packages. At the same time, in past periods of economic expansion the present unemployment rate would have required widespread wage increases to attract qualified workers. This does not appear to the case at this point in time as strong salary increases have been limited to selected fields such as accounting.
Most economic forecasters expect 2006 to be a decent, but not great year for job growth. The balance between spending growth among consumers and business has become much healthier over the past year. A slowing real estate market should lead to moderate job losses in that industry, but stronger demand for IT and business professionals are occurring just in time to absorb the slack. Demand for labor continues to be strongest for knowledge workers. However, January’s employment data showed broad-based job gains across all categories of work. Most notable was a fairly significant drop in the unemployment rate for high school graduates. It is doubtful this signals strong demand for workers in less skilled occupations, but rather probably resulted from the lingering impacts of Hurricane Katrina.
Slow economic growth in the fourth quarter and an improving labor market puts Ben Bernanke in a difficult position as he takes over for Alan Greenspan. The FOMC’s January statement granted Bernanke some latitude to set his own monetary policy during March’s meeting. The current consensus is that the Federal Reserve will raise interest rates during March and likely follow will one additional quarter rate hike later in the spring. Thus far, Bernanke has been non-committal about future FOMC policy. Financial Watch hopes Bernanke recognizes the danger of pushing interest rates up too far where it would severely hurt the U.S. housing market. There are already convincing signs housing activity has slowed down and we believe building activity will slow further down the road.
Thank you Michael Fitzpatrick, Chief Strategist for Financial Watch for making your work available through this blog. Usually economic forecasting and analysis is limited to either economic statistics, or stock market analysis, but rarely both. Your work ties the two together in a way that even I can understand. In particular, I appreciated your thoughts on the Financial Services industry and the potential for growth in 2006. And I notice that your Fin Svc. stocks are among those you have identified as most desirable to hold for 2006. It is my humble opinion that the Financial Services sector will be one of the better performing (perhaps best performing) for 2006. Having read about your background in this sector, it would be much appreciated if you could continue to frequently share your analysis of this sector. Most interesting at this time is the flatening of the yield curve, and whether it presages an economic slowdown, or as the new Fed Chairman Bernanke suggests, is a non issue. Either way, the Financial Services sector is one of those most directly affected by the shape of the yield curve, and again, your insight into the outlook for this sector would be most appreciated. Thanks again for making your work available in this manner.
Best Regards, Jim P.