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Important takeaways from the January 2014 FOMC meeting

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Part 2
Important takeaways from the January 2014 FOMC meeting PART 2 OF 4

Why is the Fed getting more optimistic about jobs in 2014?

At the December FOMC meeting, the Fed released its economic forecasts

Usually, at the March, June, September, and December FOMC (Federal Open Market Committee) meetings, the Fed releases its economic forecast for the current year and the upcoming two years. One of the nice things about this is that you can see how its forecast has changed over time. In this part of this series, we’ll look at the Fed’s unemployment forecast for 2013, 2014, 2015, and 2016, and also at how its forecast for 2014 unemployment has changed over the past few meetings.

Why is the Fed getting more optimistic about jobs in 2014?

The Fed has been taking down its unemployment numbers for 2014

As you can see from the chart above, since its December 2012 meeting, the Fed has been lowering its estimates for 2014 unemployment. At the December 2012 meeting, the Fed was forecasting that 2014 unemployment would range from 6.8% to 7.3%. At the December 2013 meeting, the Fed was anticipating that unemployment would come in between 6.3% and 6.6%.

The problem for the Fed is that the unemployment rate has been falling for the wrong reasons—it has been falling because the labor force participation rate has been falling. The latest labor force participation rate of 62.8% was the lowest since the late 1970s. If unemployment is shrinking only because the labor force is shrinking, then that isn’t a sign of economic strength.

During the press conference, Bernanke was asked directly about the labor force participation rate, and he acknowledged that the unemployment guidance was meant to be taken holistically. He further said that if unemployment dropped to the 6.5% threshold, the Fed would begin to look at the other important numbers (labor force participation rate, employment-to-population ratio, hires, fires, et cetera) before making any decisions on interest rates. This is an implicit acknowledgement that the headline unemployment number understates some of the real issues in the labor market.

Implications for homebuilders

This meeting helped reduce mortgage rates, which is welcome news to the builders. As several have noticed, especially among the builders at lower price points, the first-time homebuyer is stepping away from the market. Between having to compete with professional investors for starter homes, struggling under large student loan debt, and a lousy job market, the first-time homebuyer just can’t catch a break. The builders facing the brunt of that trend are PulteGroup (PHM), Beazer (BZH), and Standard Pacific (SPF). The builders at the high end, like Toll Brothers (TOL) and Meritage (MTH), are more insulated. Still, lower unemployment is better for the builders than high unemployment—even if unemployment is down for the wrong reasons.

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