Wednesday, February 17, 2010

FOMC Minutes: Expect "slow improvement in the labor market"

by Calculated Risk on 2/17/2010 02:00:00 PM

In the most recent FOMC statement, the Fed removed all references to residential housing. This was in recognition that the housing sector is not as strong as it appeared in November or December. This makes the FOMC Minutes a little more interesting this month ... first, as a review, here are the housing comments from the last three FOMC statements:

Nov, 2009: "Activity in the housing sector has increased over recent months"

Dec, 2009: "The housing sector has shown some signs of improvement over recent months."

Jan, 2010: No comment.

And here are the January FOMC minutes on residential real estate:

The recovery in the housing market slowed in the second half of 2009, even though a number of factors supported housing demand. Interest rates for conforming 30-year fixed-rate mortgages remained historically low. ... Sales of new homes also turned down in November and December, retracing part of their recovery earlier in the year. Similarly, starts of single-family homes retreated a little from June to December after advancing briskly last spring. ...

By and large, participants judged that residential investment had stabilized but did not expect housing construction to make a sizable contribution to economic growth during the next year or two.
And the economic outlook:
In their discussion of the economic situation and outlook, participants agreed that the incoming data and information received from business contacts, though mixed, indicated that economic growth had strengthened in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further. Participants saw the economic news as broadly in line with the expectations for moderate growth and subdued inflation in 2010 that they held when the Committee met in mid-December; moreover, financial conditions were much the same, on balance, as when the FOMC last met. Accordingly, participants' views about the economic outlook had not changed appreciably. Many noted the evidence that the pace of inventory decumulation slowed quite substantially in the fourth quarter of 2009 as firms increased output to bring production into closer alignment with sales. Participants saw the slower pace of inventory reductions as a welcome indication that, in general, firms no longer had large inventory overhangs. But they observed that business contacts continued to report great reluctance to build inventories, increase payrolls, and expand capacity. Participants expected the economic recovery to continue, but most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market this year, with unemployment declining only gradually. Most participants again projected that the economy would grow somewhat more rapidly in 2011 and 2012, generating a more pronounced decline in the unemployment rate, as financial conditions and the availability of credit continue to improve. In general, participants saw the upside and downside risks to the outlook for economic growth as roughly balanced. Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, with output well below potential over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve's dual mandate for maximum employment and price stability; others, focusing on risks to inflation expectations and the challenge of removing monetary accommodation in a timely manner, saw inflation risks as tilted toward the upside, especially in the medium term.

The weakness in labor markets continued to be an important concern for the FOMC; moreover, the prospects for job growth remained an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending. While the average pace of layoffs diminished substantially in recent months, few firms were hiring. The unusually large fraction of individuals who were working part time for economic reasons, as well as the uncommonly low level of the average workweek, pointed to a gradual increase in payrolls for some time even if hours worked were to increase substantially as the economic recovery proceeded. Indeed, many business contacts again reported that they would be cautious in hiring, saying they expected to meet any near-term increase in demand by raising existing employees' hours and boosting productivity, thus delaying the need to add employees.
emphasis added