Payrolls Jump Casts Doubt on Fed Rate Pledge

The U.S. jobless rate unexpectedly fell in January to the lowest in three years as payrolls climbed more than forecast, casting doubt on the Federal Reserve’s plan to keep interest rates low until late 2014. 

The unemployment rate dropped to 8.3 percent, the lowest since February 2009, Labor Department figures showed today in Washington. The 243,000 increase in jobs was the biggest in nine months and exceeded the most optimistic forecast in a Bloomberg News survey. Service industries grew by the most in a year, according to a separate report. 

“We’ve reached an important threshold here,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The recovery is for real.” 

Stocks and bond yields jumped on optimism the economy will weather the European debt crisis as an improving labor market fuels household spending. The data, which showed gains from factories to retailers, may boost President Barack Obama’s re- election bid and come a week after Fed Chairman Ben S. Bernanke said unemployment would be slow to decline. 

The Standard & Poor’s 500 Index rose 1.4 percent to 1,344.0 at 12:45 p.m. in New York, extending the best start to the year since 1989. The yield on the benchmark 10-year Treasury note climbed to 1.94 percent from 1.82 percent late yesterday.

Survey of Economists

The median projection in the Bloomberg survey called for payrolls to rise by 140,000. Estimates of the 89 economists ranged from increases of 95,000 to 225,000. Revisions added a total of 60,000 jobs to payrolls in November and December. 

“The payroll gains we’re seeing in this report are consistent with significant improvement in consumer spending,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York. “If we hold at these levels, it will change a lot of expectations for economic growth, the labor market recovery, inflation and the Fed’s policy response.” 

Sustained increases of around 200,000 jobs a month are needed to bring the unemployment rate down one percentage point over a year, according to Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. 

Obama used today’s report to push lawmakers for an extension of the payroll-tax cut for workers and unemployment benefits. 

“The recovery is speeding up,” Obama said at a fire station in Arlington, Virginia. “And we’ve got to do everything in our power to keep it going.”

European Sales

Elsewhere, European retail sales unexpectedly declined in December, led by Germany and France, as unemployment at a 14- year high and government spending cuts sapped consumer demand. 

Gains in U.S. employment last month were broad-based, including manufacturing, construction, temporary help agencies, accounting firms, restaurants and retailers. 

Employment, overtime and hours worked in factories increased as manufacturers, who have been leading the two-year recovery, boosted production to rebuild inventories and meet global demand for their goods.

Assembly-line workers put in an average 41.9 hours of work each week, the most since January 1998, while overtime hours climbed to the highest since March 2007. Manufacturing payrolls increased by 50,000 in January, the most in a year. 

Peoria, Illinois-based Caterpillar Inc. (CAT), the world’s biggest maker of earthmoving equipment, plans to hire more workers this year as it expands facilities, including in Victoria, Texas, and Winston-Salem, North Carolina, Chief Financial Officer Edward Rapp said yesterday.

Employment Growth

“Those are the things that will lead to employment growth here,” Rapp said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” 

The unemployment rate, derived from a separate survey of households, was forecast to stay at 8.5 percent, according to the survey median. The drop in the jobless rate reflected a 381,000 decrease in unemployment at the same time 250,000 Americans entered the labor force. 

Private payrolls, which exclude government agencies, rose 257,000 in January after a revised gain of 220,000 the prior month, marking the biggest back-to-back gain since March-April. It was projected to climb by 160,000. 

Employment at service-providers increased 162,000, the most in four months, reflecting faster job gains in retail, transportation and leisure and hospitality.

Software Company

Tibco Software Inc. (TIBX) plans to hire 500 people in the U.S. this year as the economy improves and Europe works out its debt crisis, Vivek Ranadive, chief executive officer of the Palo Alto, California-based company said in an interview. 

“We are hiring quite rapidly now, all in sales and service,” Ranadive said last week at the World Economic Forum’s annual conference in Davos, Switzerland. “It’s a good time to hire.” 

The Institute for Supply Management said today that its index of non-manufacturing industries, which account for almost 90 percent of the economy, rose to 56.8 in January from 53 a month earlier. The Tempe, Arizona-based group’s measure was projected to climb to 53.2, according to the median forecast in a Bloomberg survey. Readings above 50 signal growth. 

Construction companies added 21,000 workers last month. The number of people unable to go to work because of bad weather, a proxy for the climate’s effect on the labor market, was 206,000 last month, less than half the 424,000 average for the month since 1976. The shortfall signals mild weather may have played a role in the gain in employment, according to Neil Dutta, an economist at Bank of America Corp. in New York.

Government Payrolls

Government payrolls decreased by 14,000 in January, reflecting cuts at the federal and local levels. 

Average hourly earnings rose 0.2 percent to $23.29, today’s report showed. The average work week for all workers held at 34.5 hours. 

The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- decreased to 15.1 percent from 15.2 percent. 

The Fed said on Jan. 25 after a two-day meeting that it would keep its benchmark lending rate low “at least” until late 2014 from a prior target of mid-2013. 

Bernanke, speaking at a news conference after the meeting, said that the option of a third round of large-scale bond purchases, known as quantitative easing, is still “on the table.”

‘Long Way to Go’

“We still have a long way to go before the labor market can be said to be operating normally,” Bernanke told the House Budget Committee in Washington yesterday. 

Today’s figures may change the Fed’s thinking, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The report definitely scales down the odds for QE3, particularly the drop in the unemployment rate,” Feroli said. “There is strength in the labor market.” 

The number of unemployed Americans dropped to 12.8 million, the lowest since January 2009, from 13.1 million in December. Still, the number of those who have been unemployed for 27 weeks or more -- a source of concern for the Fed -- was little changed at 5.52 million and accounted for almost 43 percent of the total. 

“We should welcome the headline numbers, they are really good, but we should not lose sight that we have structural issues that aren’t being dealt with,” Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. 

Among those still looking for work is Richard Richardson, 33, a former assistant district attorney for the city of San Francisco who moved to the Washington area with his wife last year to look for a government job. 

“It’s been a trying process,” he said, adding that he hasn’t yet had a single interview. Still, “I do feel confident that it’s just a matter of time.” 

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