Economic Commentary for June 5th, 2013: All Eyes on Jobs

ISM Index

Uncertainty about future Fed policy helped keep the upward trend in mortgage rates in place for another week. However, this week’s increase was relatively minor compared to prior weeks.

Recent economic data has indicated that the pace of growth of the labor market may be slowing. This is causing investors to worry that Friday’s critical Employment Report will also fall short of the consensus forecast. A wide range of data has hinted at this. The ADP estimate for private sector job gains in May was well below expectations. Weekly Jobless Claims rose back above the 350K level. The employment component of the ISM Services sector report also showed a slowdown in the pace of hiring.

These shortfalls in the recent labor market indicators have been small in magnitude, but investors have been reacting sharply even to minor readings. The reason is that the Fed has directly tied its bond purchase program to the health of the labor market. Fed officials have said that when they see “significant, sustainable” improvement in this area, they will taper their bond purchases. Fed officials, however, are divided about what constitutes this level of improvement, creating confusion among investors. Recent comments from Fed officials suggest that support is growing for the Fed to begin to scale back its bond purchases. Friday’s Employment Report will go a long way to persuade Fed officials about what action is called for.

Friday’s Employment Report will be a huge event. The consensus forecast is for an increase of 165K jobs in May. The next FOMC meeting will be on June 19. The big question is the timing for the Fed to taper its bond purchases. There will be a European Central Bank (ECB) meeting tomorrow. No change in rates or policy is expected.