April jobs report will test Yellen’s rate plans

A little scary Twilight Zone music, please. Friday’s April jobs report could make Federal Reserve Chair Janet

Yellen’s job extremely difficult — no matter what the number is.

The Labor Department will announce Friday at 8:30 a.m. the number of jobs that were created last month. Experts are expecting about 185,000 new jobs, which was about what they had been expecting in March.

But it turned out that only 98,000 jobs were created in March, which caused a problem for Yellen because she is determined to raise interest rates. For that, she needs the economy to show good growth — which it hasn’t.

Since that disappointing employment report, the Commerce Department has delivered even worse news.

The US economy in the first quarter, as measured by the Gross Domestic Product, grew just 0.7 per- cent at an annualized rate. That’s barely above recession levels and threw into doubt Yellen’s ability to keep her promise of higher interest rates.

And at least one segment of the economy, auto sales, showed weakness in April. Unless there’s a turnaround, second-quarter growth may not make up for any of the slack exhibited during the first three months.

That’s the weak economic scenario that Yellen was working with when the Fed’s policymaking open market committee met for two days this week. When the committee adjourned on Wednesday, the Fed did nothing to change rates.

But the Federal Open Market Committee still holds out hope that the economy was simply in a temporary slump. In other words, Yellen was trying to let those wired into the financial markets know that she is not abandoning her desire to raise interest rates one, two or maybe even three times this year.

I’ said months ago that Yellen’s desire for that many rate hikes was delusional. The economy isn’t going to grow as quickly as she was hoping. I also predicted that the Fed would have to abandon any hope of bringing rates back to normal levels — a prediction I’m sticking to.

Next up will be Friday’s report, which could be more confusing than helpful in letting the Fed — and all of us regular people — understand what the economy is really up to.

Growth of around 185,000 jobs would be a relief after what happened in March. Job growth in January and February was stronger than most people expected.

To put it simply, the government had its thumb on the scale during April, and this continues into the May employment numbers that will be released the first week of June.

During those two months, Labor arbitrarily adds a huge number of jobs to its estimates — a guess-timate of jobs added that it can’t fully track.

In April 2016, the guesstimate was plus-255,000 jobs. In May 2016, the guesstimate was plus-231,000 .

Not all those guesstimate additions flow straight to the top line jobs number.

They are massaged all through the process. But it’s important for you to know today that Friday’s numbers will be, as they say in track and field, wind-aided.

The positive guesstimates will help the final number.

If the employment numbers come in strong on Friday, that is, above the 185,000 forecast — and I think that’s possible — the Fed will be misled into thinking the economy is recovering from a winter slump.

And it will stay on target for more rate cuts.

A job report that is no worse than ordinary, say 150,000 jobs or so, will conceal the fact that the gain wouldn’t have been very good without the benefit of the guesstimates.

If the job report is downright lousy, the thumb-on-the-scale will be concealing the fact — for April and for May — that the US economy is falling into a deeper slump than the recent Commerce Department report on the Gross Domestic Product indicated.

To put it another way, no matter what Friday’s numbers reveal, the Fed is operating blind.

And so are Congress and the Trump White House, for that matter.

Economic, fiscal and tax policy can’t be done properly without data that show what is really happening in the economy.

One last thing. The Fed not only wants to raise interest rates, it needs to do so.

Rates have remained low for so long that they are no longer effective in boosting economic growth.

But they are taking money out of the pockets of savers, who are cutting back on spending. A cutback in consumer spending — which makes up 70 percent of GDP — is why the economy stalled in the first quarter.

Even more important, the Fed right now is virtually weaponless in fighting an economic slowdown. It has raised rates twice since December. And in a pinch it could rescind those two hikes by cutting rates by an equal amount.

But that’s all it has — two rates cuts before it is out of ammo. That’s why Yellen — whose term as chair is up in January — needs to raise rate more quickly.

If she gets a strong number on Friday, she might get her excuse. But if that good number is being artificially boosted by the subtle guesstimates, her higher rates will hurt the economy.

Without knowing the thumb-onthe-scale secret, the Fed is in a loselose situation.