Why the jobs report calls for more Fed actionMay 3, 2013: 11:25 AM ET
It was a stronger-than-expected jobs report, but we're still a long way from the Federal Reserve's key target of 6.5% or lower.
FORTUNE – If the U.S. Federal Reserve's remarks earlier this week seemed at all vague, today's jobs report should give us a clearer picture of what the central bank might do next to boost the economy.
U.S. businesses added 165,000 jobs in April. Stocks soared and Wall Street cheered, as the figure came in better than the 140,000 jobs expected. But while the unemployment rate fell slightly to 7.5% in March from 7.6% the previous month, it adds to reasons why the Fed won't pull back efforts to stimulate the economy. The central bank has been buying up billions of dollars worth of bonds every month, which has driven down the cost of borrowing to record lows. Though the measures have led to more home sales and business investments, it hasn't translated to many more people finding work.
If anything, April's job report underscores why there's room for the Fed to do more.
Officials have said interest rates won't rise until unemployment drops to at least 6.5%. But that statistic is easily misunderstood. The unemployment rate says little, if anything, about how many people are actually working because it counts only people actively searching for work. So while the unemployment rate has declined, much of that has to do with workers giving up their job search as opposed to actually landing a job.
On Wednesday, the Fed acknowledged that the economy, while improving, isn't ready to ride without its training wheels. Officials said it would continue with its stimulus campaign at the same pace it has since December, but analysts have disagreed on the central bank's intent. Some think the Fed will do more, while others believe it at least won't pull back any time soon.
Whatever the intent, April's report shows more action is needed. The share of Americans with jobs hasn't significantly changed much. Since 2010, just as the economy emerged from recession, the employment-to-population rate has stood steady at about 58%, even as the unemployment rate has fallen by more than 2 percentage points. Which means that while companies have stopped shedding workers, the economy is only creating just enough jobs to keep up with population growth, even while the Bureau of Labor Statistics revised upward its estimate for job creation in February and March.
In the months ahead, there could be an uptick in layoffs as higher federal taxes and spending cuts that kicked in earlier this year begins to work their way into the economy. The recession may be behind us, but the Fed has been particularly worried about how the policy changes might weigh on the economy. Private companies may be creating more jobs, but the government has continued to be a drag. It shed 11,000 jobs in April, and that likely will continue.
All this gives the Fed reason to maintain its stimulus program, and perhaps further reason to do more.