Today’s U.S. employment report was surprisingly good -- so good, in fact, that analysts are speculating that the Federal Reserve will end its stimulus program. It shouldn’t.
This isn’t to deny that the jobs report was encouraging. The economy added 204,000 jobs in October, far more than the median increase of 120,000 predicted by economists surveyed by Bloomberg. The numbers for August and September were revised upward, too. The gains were broadly spread across the economy.
The unemployment rate increased from 7.2 percent to 7.3 percent, but that doesn’t really change the message. Unlike the figures for employment (which come from a different survey), the unemployment rate was badly distorted by furloughs due to the government shutdown. The resulting increase in unemployment is likely to be reversed in November.
Despite the shutdown, the labor market seems to be slowly strengthening. If the shutdown hadn’t happened, it would be strengthening even more.
Even so, there are two reasons for the Fed to pause before deciding to reduce its program of bond purchases, or quantitative easing, to stimulate economic growth. The first is that October’s figures are less trustworthy than usual. The shutdown has probably affected the estimates in more ways than are immediately apparent. Extracting the signal from the noise is unusually difficult, and one month’s heavily distorted numbers aren’t a good basis for changing policy.
More important, even if the improvement in the labor market turns out to be real, there’s still a long way to go. Employment fell much further in the recent recession than in previous postwar downturns, and has come back only slowly. More than five years on, jobs still haven’t returned to their pre-recession peak, and the working-age population has grown.
When the U.S. last grew its way out of a recession of remotely similar depth -- from 1983 to 1986 -- employers added an average of 240,000 jobs a month. Today’s good news doesn’t get the economy back to that rate. In those earlier recoveries, annualized, inflation-adjusted economic growth averaged more than 5 percent a quarter. These days, the estimated 2.8 percent growth in the three months through September is seen as cause for celebration.
With so much slack in the labor market and inflation well suppressed, the Fed should be in no hurry to signal a tighter stance of monetary policy. Despite October’s jobs figures, the best policy course hasn’t changed. Congress should ease short-term fiscal policy by ending sequestration, and turn its attention to long-term fiscal control through reform of taxes and entitlements. And the Fed should keep short-term interest rates at zero while maintaining QE.
The trigger for a change in monetary policy should be a tightening labor market and signs of inflation. There’s no hint of either just yet.
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