Interview: Dean Phillips on jobs report
>> federal reserve governor edward gramlich says he does not know what’s behind the conundrum of long-term rates falling as the fed raised short-term by two percentage point.
>> the fact that it is inconsistent with what has happened historically matters to us because we like to feel that we know how the economy works and, you know, you raise short rates and long rates normally behave in a certain way. if they don’t, you’re puzzled and you wonder if that shakes the foundations of other aspects of your macro economic models.
>> and concerning future rate increases, dallas fed bank president’s richard first ‘s comments that “we’re in the eighth inning,” gramlich said, “i don’t know what inning we’re in.” how will the fed perceive today’s jobs data and interest rates? former federal reserve governor susan phillips joins us for a look inside the fed. she is dean of george washington university’s school of business, joining us from our washington bureau. dean phillips, how concerning is today’s jobs report?
>> again, it’s only one month and it’s a bit disappointing but we did see the unemployment rate go down slightly. you really have to look through several months and it has been strong, fairly strong, this year. i think next month, if we see a continuation of this trend, that would be a real concern.
>> do you look at the unemployment rate? how important is it, given that, when that shows improvement but the payrolls number does not, you often hear people say, well, let’s look at the household survey, let’s look at the unemployment rate.
>> they’re both pieces of information and there are lots of things going on in these two markets . so if some people pull out out of the job market , that affects the unemployment rate. but i think you really probably have to look at both of them and it’s certainly in the right direction.
>> what is your sense, when you say “in the right direction,” how strong is job creation here in the u.s.?
>> well, i think we certainly might like to have seen a little bit more than 78,000 this month but bearing in mind that last month was really very strong, so there may be a little bit of payback in this month and so i don’t think it’s a major concern. but, again, i think we’re going to have to see if this is a trend.
>> now, treasuries, very interesting response today, they fell as low as 3.8% on the 10-year, reversed course. that 10-year now at 3.98%. does this mean, do you think, investors are saying yields had come way too low?
>> i think that that’s surprising and i think with the bond market , you have to recognize that there may be some overreactions in the short run. but, you know, i think that we’re all surprised that long-term rates have gone down while the fed has been raising short-term rates.
>> why do you think that’s happened?
>> well, i guess there are a number of things that i could point to but i’m not sure we know the exact answer. some of the things i would point to is that a lot of corporations are sitting on a lot of cash so they haven’t had the need to go into the market to raise funding, which would have gone the other direction, pushed interest rates up. i also think a lot of the other countries, investors from other countries are looking at u.s. interest rates as strong relative to their own so they’re demanding these securities, putting downward pearl harbor on―pressure on interest rates. those are two of the things i would point to. we’re going to have to see if this stays down or if this is more a short-term pattern and just a temporary downward pressure.
>> what’s your opinion? do you think it’s temporary or will yields spike higher?
>> i don’t know that we’ll see it spike higher but i think at some point we will see it go up. i don’t think there’s doubt about that. but we need to see the economy, as the economy picks up, you’ll see more pressure on longer term rates going up but right now it’s a strange situation.
>> will we hear alan greenspan specifically address this when he speaks to congress next week?
>> i think he will and he may be in the same position many of us are, not knowing all of the answers at this point. but my guess is he’s got lots of economists over there looking into it even as we speak.
>> what do you think we can expect him to say?
>> i think he’ll try to identify some of the trends that may be affecting the longer term rate and he’ll probably look at some of the supply-side effects and who’s been buying and who’s been selling, that kind of thing but, you know, it’s very difficult, you know, when you’re talking about traders who sometimes hear from a federal reserve chairman what they want to hear or they look at the employment report and they hear what they want to hear, maybe not reality. so sometimes it takes a little bit of time for reality to catch up with the trading.
>> dean phillips, thank you so much. we’ll be right back.
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Listen Market briefing --- Ellen (slow)
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treasuries bounced off their lowest levels in more than a year. our top story, the jobs report.
>> i’m encouraged that the american economy is continuing to create jobs. i don’t put too much store in one month’s numbers. on a monthly basis, these numbers bounce up and down.
>> u.s. employers added 78,000 workers to their payrolls in may, the fewest since august 2003 and that is fueling speculation that federal reserve policymakers are almost complete raising interest rates. the jobs number, less than half as much as expected, follows a gain of 274,000 jobs in april. we will bring you numbers and reaction from key players. we’ll get reaction, for example, from former fed governor susan phillips at 12 minutes after the hour. yields on 10-year treasuries today fell as low as 3.8 shortly after the jobs report, then climbed to 3.98% on speculation they dropped too low. the settling numbers for the stock indexes -- last month’s employment growth less than half the median forecast of economists surveyed by bloomberg.% it follows a gain of 274,000 jobs in april and marks the weakest month for jobs ans august―since august 2003, a disparity with the household survey which showed a jobs gain of 376,000 for the month, pushing the unemployment rate down in may to 5.1%. it was the nonfarm payroll number that caught economists’ attention.
>> i believe it is a negative jobs report and i say that notwithstanding the fact that the enemployment rate edged down a bit and the householdsurvey looked fairly strong. >> looking inside the numbers, his. the big biggest change in the april was in the services sector. most of the increases in may were in education and health services. construction continues to show strength of the hiring, in fact, up 20,000 in may following an increase of 48,000. manufacturers, however, cut 7,000 jobs in may and the labor department says 9,000 factory jobs were lost in april, more than first reported. average hourly earnings rose .2%, in line with economists’ expectations, so no real surprise in terms of wage inflation. the average work week held steady at 38.8 hours. the bush administration is convinced the job market is strengthening.
>> the important thing is the trend, where we’re heading. i think it’s clear we’re in an economy capable of generating and will continue to generate lots of good jobs for people.
>> a former dallas fed president says one month’s numbers are not enough to convince alan greenspan and his colleagues to stop raising rates immediately but after a pause is likely later this year.
>> if everything goes about as it’s going right now, i think 3.5% would be enough for a while.
>> the fed meets next on june 30. another economic report out to ay, the institute for supply management gauge of the service side of the economy came in at 58.5, less than our survey and lower than the april figure. however, above 50 and still signaling expansion. here’s the rest of the yield curve -- fed chairman alan greenspan will be testifying to congress next week on the economy. in currencies -- prices rose for crude oil, up 2.6%. prices now up eight of the last nine sessions refiners boosted fuel output for sorm. summer. gains across the board for gas futures, heating oil futures and natural gas futures. 24 of 55 analysts and strategists that we surveyed expect oil prices will continue to rise next week. investors said they couldn’t shake the negative tone today. let’s get more on the trading action from deb kostroun at the big board.
>> the market opened lower and never made it higher, mainly because of so many different factors. of course, the weaker payrolls numbers, weakest jobs creation since august 2003, raising questions about the economy. the managing director at astor asset management saying the weaker payroll number keeps inflationary pressures down, making it clear the fed will end the rate tightening cycle soon. bonds initially rose on the jobs report, fueling speculation the fed may stop raising interest rates but that reversed throughout the day. also, oil rising 2.6% and just another event that really hurt stocks on the day. talk that refiners are struggling to meet growing demand for gasoline. looking, as we’re talking about interest-rate-sensitive areas, mortgage lenders generally lower along with homebuilders. a little bit of mixed market in the mortgage lenders. but homebuilders have been performing quite well recently, but taking a dip today. also, utilities, very much tied to the bond yields and utilities lower on the day. take a look at the s&p gainers. energy, real estate and utilities. these were the performers. laggards included tech hardware, software and autos. tech hardware and software have been emerging leaders in the market over the past month or two so these were actually some of the ligest laggards -- biggest laggards. exxon-mobil, a little bit lower, but energy stocks, the best performers in the s&p 500. wal-mart having their annual shareholder meeting going on friday, saying same-store sales aren’t what they used to be. same-store sales hurt by part of their new stores. chief executive officer lee to tt saying they may have to add organic food to get higher income shoppers.
>> and the nasdaq composite index with its biggest drop since april 28. june grasso has this report from the nasdaq.
>> computer shares were the biggest drag on the nasdaq today and leading them down was apple computer. shares fell as much as 5.7% after a website, appleinsider.com, said shipments of the ipod may decline. the company may be overstocked with about a month remaining in the current quarter. shares of apple tripled last year. other computer shares declining, as well, microsoft, oracle, intel. despite the fact that the world’s biggest computer chipmaker had its second-quarter earnings and sales forecast raised at j.p. morgan. j.p. morgan cited higher demand for the company’s chips used in laptops and raised its second-quarter earnings per% -share estimate by 3.7% and revenue by 1.7%. sun microsystems declined after analyst with merrill lynch said they are neutral to slightly negative on the acquisition of storage tech. sun used more than $3 billion of its $7.5 billion in cash for a deal that the analyst says doesn’t seem to accelerate revenue growth. google also down despite the fact that u.b.s. raised its 12-month price target on google to $350. that makes three analysts who have raised 12-month share price estimates on google this week. credit suisse first boston increased its estimate to $350 from $275 while piper jaffray boosted forecasts to $300 from $275. analysts have underestimated google’s earnings for each of its three quarters as a public company. amazon, ebay and yahoo, other internet shares, also declined today at the nasdaq. i’m june grasso, bloomberg news, at the nasdaq marketsite in times square.
>> alberto vilar, founder of amerindo investment advisers, won a reduction in bail from $10 million to $4 million but will still spend the weekend in jail. in another case, jurors at the fraud trial of healthsouth founder richard scrushy reached no verdict in the 10th day of deliberations after they said they were deadlocked on all 36 counts and the judge ordered them to keep working. excredit suisse first boston banker frank quattrone citing a u.s. supreme court ruling this week that overturned the quickeds of accounting firm arthur andersen urged an appeals panel to reverse a guilty verdict in his case. when we return from our break, we will continue our coverage of the may jobs report with a look at how the fed will view the data. we’ll speak with former federal reserve governor susan phillips.
