Bernanke Warning on Jobs Vindicated by March Payrolls Report

The Labor Department’s March jobs report may have proved Federal Reserve Chairman Ben S. Bernanke right after he warned that payroll gains might slow as companies adjust staffing for a period of moderate growth.

Employers in the U.S. added 120,000 jobs in March, the fewest in five months, the report showed yesterday. The unemployment rate fell to 8.2 percent from 8.3 percent the month before as people stopped looking for work. The March report followed the best six-month streak of job growth since 2006.

“Chairman Bernanke should be putting out the world’s biggest ‘I told you so,’” said Phillip Swagel, an economist at the University of Maryland and former assistant Treasury secretary in George W. Bush’s administration. “It must give the Fed some comfort that they continue to have this accommodative stance.”

The data probably won’t trigger a decision to buy more assets when Fed policy makers next meet April 24-25, nor will it alter their commitment to keep the benchmark lending rate around zero until late 2014, said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

At the same time, he said, disappointing labor reports in April and May could help build a case for further easing at the June meeting of the Federal Open Market Committee, headed by Bernanke.

“When you look at employment per se, it’s not up to the level he wants to see,” Silvia said. “It’s very difficult for the Fed to say 8.2 percent, that’s good enough.”

Yellen, Dudley

More insight into the Fed’s response to the data will come next week when policy makers discuss the economic outlook. Vice Chairman Janet Yellen will speak in New York on April 11, and William C. Dudley, president of the Federal Reserve Bank of New York, will speak in Syracuse the next day. Bernanke is scheduled to discuss financial stability on April 9.

In a speech on March 26, Bernanke said recent strong job gains may be a “reversal of the unusually large layoffs that occurred during late 2008 and over 2009.” If that is the case, he said, then “significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

To further reduce the unemployment rate by one, two, or even three percentage points, “we need to start thinking of not just having growth of 2 percent or 2.5 percent, but growth of 4 percent or 5 percent,” said Betsey Stevenson, former chief economist at the Labor Department and a visiting assistant professor at Princeton University. “We just haven’t had that here.”

Weekly Earnings

The March jobs report showed scant improvement in some of the trends that the Fed chairman said he finds most worrisome. The share of the unemployed who have been out of work for 27 weeks or more was little changed at 42.5 percent in March. Average weekly earnings fell, and the average work week decreased to 34.5 hours from 34.6.

Last month, and in several speeches and testimony before that, Bernanke has made it clear that long-term unemployment threatens to erode workers’ skills and eventually detach them from the labor force, ultimately reducing how fast the U.S. economy can grow. Bernanke, a scholar of the Great Depression, has never embraced that as an acceptable outcome, or one that the Fed can do nothing about. He also hasn’t taken the view that long-term unemployment is fully explained by a mismatch of worker skills with employers’ needs.

“What will lead to more hiring and, consequently, further declines in unemployment?” Bernanke said in last month’s speech to the National Association for Business Economics. “The short answer is more-rapid economic growth.”

Growth Forecast

The U.S. economy expanded at a 3 percent annual rate in the final three months of 2011, helping boost job growth to an average monthly gain of 246,000 from December through February. Growth may slow to 2 percent in the first quarter, according to the median estimate in a Bloomberg News survey of economists.

Manufacturing, a mainstay of the recovery, has cooled in recent months. The Institute for Supply Management’s factory index was 53.4 in March, down from a high of 59.9 at the beginning of last year. Readings above 50 signal expansion.

“Overall, we ought to focus our attention on the fact that we’ve got to keep the growth rate of the economy at a sufficient level that it generates jobs,” said Austan Goolsbee, former chairman of the White House Council of Economic Advisers and an economist at the University of Chicago’s Booth School of Business. That probably means the economy has to grow faster than 2 percent, he said.

Stimulus Caution

U.S. central bankers have held the benchmark lending rate near zero since 2008 and purchased $2.3 trillion in bonds to spur growth. Assets on the Fed’s balance now total $2.9 trillion sheet, compared with $925 billion at the start of 2008. Fed officials are speaking and acting with more caution. Rather than pump the balance sheet up further in September, they opted instead for a program, dubbed Operation Twist, to shift the portfolio into longer-term assets.

“The probability of needing to do additional stimulus is lower,” San Francisco Fed President John Williams told reporters April 4. Cleveland’s Sandra Pianalto, Atlanta’s Dennis Lockhart and Richmond’s Jeffrey Lacker all voiced reservations about additional accommodation last week. All four presidents are voting members of the Federal Open Market Committee.

One concern is that inflation measures are near or above the Fed’s 2 percent target at a time when crude oil prices have jumped 4.5 percent this year. The personal consumption expenditures price index rose 2.3 percent for the year ending February. Excluding food and energy, the index rose 1.9 percent.

“The Fed is in a wait-and-see mode through June when they will see two more prints of employment data for April and May,” said Mark Spindel, chief investment officer at Potomac River Capital in Washington. “We also need to see more daylight between the inflation rate and their 2 percent target.”

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