Odds Grow for a Blowout Jobs Report

The collective weight of evidence on current labor-market trends suggests that the chance of a blowout employment report -- one that unmistakably indicates a real turn -- has increased substantially. Such a report seems likely within the next three months, and we could even see it in the December employment report due Friday. A gain of nearly 300,000 is quite possible.

A robust employment report is crucial to both the economy and the financial markets. Income growth is the essential ingredient for attaining self-reinforcing sustainable economic growth, and it could well be the driving force behind economic growth in 2004. If income growth accelerates from its recent slow year-over-year pace of about 3% to its historical average of about 5%, incomes will grow by an added $180 billion, boosting economic growth by almost 2 percentage points. This is the stuff that expansions are made of.

Market Implications

To the financial markets, evidence of stronger labor demand would help to reinforce trends of the past year in stocks, bonds and commodities, and it could result in a change in monetary policy. Interest rates would probably move above the high end of their recent range, led by a rise in short-term interest rates, thereby resulting in a flatter yield curve.

Credit spreads would remain tight, and the dollar might see a reprieve from its recent losses, owing to indications that the Federal Reserve may hike rates, reducing the rate gap between the U.S. and other nations as well as the supply of dollars put into the world financial system.

If job growth picks up, it also help will prove that tax cuts successfully bridged a gap from a period of slow income growth to a period of more rapid growth. In turn, President Bush is more likely to be re-elected and to continue the pro-growth fiscal policies that ignited growth in 2003.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. He appreciates your feedback and invites you to send it to Tony Crescenzi.

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