What Fed’s Tapering of QE3 Means For Job Market

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The U.S. unemployment rate has dropped nearly a full percentage point since January 2013, and the Federal Reserve expects the trend to continue.

The Federal Open Market Committee (FOMC) said in late December that it will cut its quantitative easing program by $10 billion per month beginning in January 2014, notes CNBC. The U.S. central bank will now buy $40 billion in U.S. Treasurys and $35 billion in mortgage-backed security per month, according to statements by Chairman Ben Bernanke.

Many economists expected the Fed to start reducing its $85 billion-per-month asset purchase program in September, one year after it started. But disappointing unemployment reports from late last summer, along with the federal government threatening a shutdown, delayed the reduction. That disappointment has changed to bullish optimism for employment in 2014.

Manufacturing Jobs Coming Back?

The overall unemployment rate should drop to the magic number of 6.5 percent by June 2014, according to James Bullard, President of the St. Louis Fed. Moodys Analytics, an industry leader in bank stress testing and economic forecasting, is even more optimistic. Mark Zandi, the company’s chief economist, said in a December 12 press release that he expects “full employment,” or a 5.75 percent unemployment rate, by the end of 2014. Manufacturing may be one of the catalysts for this trend.

The Institute of Supply Management (ISM), a Tempe, Ariz.-based education firm, put its U.S. manufacturing index at 57.3 for November. That represents the highest reading since early 2011 and nearly one full percentage point higher than October, according to a press release. Manufacturers have benefited from the housing recovery, reports Bloomberg. The demand for heavy equipment and appliances has created the need for these businesses to hire more help. Construction spending in the U.S. rose 0.8 percent in October, which was more than anticipated, even with the government shutdown, according to the Department of Commerce

The Fed indicated interest rates will remain at historic lows well past that 6.5 percent unemployment target. The slightest increase would not only de-rail the manufacturing job sector recovery, but also the housing boom that has continued through 2013. The double-edged sword of low interest rates also discourages consumers from saving money. Mark Perry, an economics professors a the University of Michigan-Flint, told Marketwatch that even a one percent rate increase on the $7.6 trillion total in small time deposits and savings creates an additional $76 billion per year in interest payments.

Gains and Loses In Other Areas

The health care industry gained 28,000 jobs in November, 1000 more than manufacturing, according to the Bureau of Labor Statistics. Home health care saw the biggest gains, while senior care facilities lost 4,000 jobs. Mandates pursuant to the Affordable Care Act, along with at least 2 million new customers already in the ACA system, will keep demand for medical personnel higher throughout the year. The retail sector was down, while transportation and warehousing were boosted by the hiring of couriers and truckers.

The Fed indicated that QE3 will cease completely by the end of 2014. The tapering will continue in $10 billion intervals at each of the central bank’s eight scheduled meetings in 2014.

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