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Today’s interview is with Jim O’Sullivan, Chief U.S. Economist at High Frequency Economics.
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BUSINESS INSIDER: To what extent do you think poor weather has impacted this winter’s economic data?
JIM O’SULLIVAN: The weather probably explains most — not necessarily all, but most — of the sudden weakening. More generally, big swings in the raw data make seasonal adjustment challenging at this time of year. The seasonal factors allow for about a 3 million drop in payrolls and a 19% drop in retail sales in January. Meanwhile, the relative stability in jobless claims and confidence suggests that underlying trends have not changed significantly. At 338K, the 4-week average in claims is down slightly from 343K in all of 2013, when payrolls gains averaged 194K per month. Of course, that does not preclude the weather from causing payrolls to be weak again in the February report; the weather was particularly harsh during the sample week.
BI: What’s the big story that is not being told now?
JO: I think there is still an under-appreciation of the degree to which the downtrend in the unemployment rate has represented a genuine reduction in slack — in large part because of an under-appreciation of the degree to which the drop in the participation rate has been due to secular and structural forces. The economy is not tight in any absolute sense, but it is moving in that direction, with the downtrend in unemployment corroborated by consumer and business surveys. Does this mean the Fed will be tightening this year? No, but it does suggest that the forward guidance for the next few years is too dovish. The bond market will start to look ahead again if and when weather-related weakness is reversed.
BI: Are you optimistic about Janet Yellen as Fed chair?
JO: I suspect she is under-appreciating the degree to which the downtrend in the unemployment rate has represented genuine tightening of the labour market but I also think she will ultimately respond appropriately when wage pressures become more apparent. She is widely viewed as a dove, but, more accurately, I think she is a big believer in the importance of the unemployment rate in determining inflation. Part of her dovishness now appears to be the view that the unemployment rate has overstated labour market tightening.
BI: The stock market is roaring back to all time highs. Do issues in EM not have as big an impact on U.S. markets as people argued a few weeks ago?
JO: No, certainly if EM issues are more country-specific than systemic. Indeed, the near-30% rise in the S&P 500 last year was despite a 5% decline in overall EM equities. The late-1990s Asian crisis was a more extreme example, with U.S. equities surging as EM equities collapsed.
BI: What’s something you’ll be watching this week and next?
JO: A few things. Will the manufacturing ISM index reverse some of last month’s plunge? Does the non-manufacturing index hold on to last month’s gain? Do claims come back down after the higher weekly reading last week? If payrolls are weak again, do the details suggest weather effects? Is winter over yet?