Janet Yellen
Janet Yellen, the new Federal Reserve chair, has had her life made complicated by the latest nonfarm payrolls data(Reuters)

Economists spend their lives trying to establish a coherent explanation of the past.

The data that is collected to do this concerns the decisions made by and interactions of billions of people.

For an economist to claim that they can a build definitive causal explanation from this data is arrogant to a degree.

How does an economist know the particular sample of data he has chosen is correct and why is the narrative they have derived from it the right one?

If a person thinks understanding the past is hard enough imagine if your job is to read the future and be responsible for it.

This what Janet Yellen, who is chairwoman of the Federal Reserve, must do as the prospects for the world economy partially rest on her shoulders.

Her job became much harder with the latest round of the nonfarm payrolls figures which sent a message that investors hate.

The US unemployment rate dropped to 6.7% in December but only 74,000 jobs were added to the world's largest economy, according to official figures.

The Bureau of Labor Statistics (BoL) explained the overall jobless rate fell from 7% in November to 6.7% - representing a 0.3% drop – and nonfarm payroll employment (relating to jobs in goods, construction and manufacturing firms) increased by 74,000.

These numbers were dire and came in below the expected 195,000. It was the worst jobs growth since July 2011.

The message from the data is ambiguous and contradictory for economists and jobs seekers.

While it is good that the unemployment rate is falling, the fact the rate of job creation has fallen with it is confusing and could have dramatic implications for the monetary policy of the Federal Reserve.

The Fed has explicitly stated that it will only start to scale down its monthly asset purchase programme of $85bn (£52.3bn, €61.8bn) per month once the labour market has shown signs of long-term improvement.

The Fed started winding down its monthly asset purchase programme from $85bn to $75bn in December 2013 on the assumption that the American economy is finally out of the worst recession it has experienced since the Great Depression.

The economy is still bad and life is a daily struggle for millions of Americans.

But the argument is that things are not staying the same or deteriorating unlike the previous five years which have been miserable.

Since the Fed with other central banks including the Bank of England has made the labour market more of a concern at the expense of inflation targeting to some extent, what happens in the labour market is of more importance.

Champions of inflation targeting and central banks that have pursued it have been criticised by left-leaning economists in the Keynesian tradition as insensitive to the real needs of workers.

The themes of full employment, government intervention and more regulated markets are among the greatest passions of those who side with Keynes on the big economic questions.

Those who voted for Yellen in her Senate vote were overwhelmingly members of the Democrat party and liberal.

Her repeated statements that it is the job of the Fed to worry about jobs and not just to be obsessions with interest rates and prices has pleased her supporters.

However, the problem for Yellen now is that the yardstick by which perhaps she attaches most importance has become confusing.

The question of how Yellen will react to this jobs data is whether she sees a short-term pattern or a long-term trend.

Analysts do not know how to read let alone react to the data and Yellen could be as uncertain as they are.

Yellen will probably want the lack of jobs created to be temporary and will want the nonfarm payrolls higher next time.

Expert Views

"After the gasps came headscratching. If ever there was a curveball, this was it," said Marcus Bullus, trading director at MB Capital.

"These limp numbers are as puzzling as they are surprising - and they caught the markets with their guard down.

"For the US economy to have added fewer than half the number of jobs expected is a serious worry - and the first stumble in what had begun to look like a relentless rate of job creation. All bets are now off on the Fed's tapering plans. Many are now questioning whether it began to turn off the QE taps too soon.

"If Janet Yellen was hoping to have any kind of honeymoon period when she takes over the top job, she can forget it. The unemployment rate has fallen to just 6.7%, but this is a meaningless victory after the participation rate slumped to its lowest level for an extraordinary 35 years.

"Such a large number of people leaving the labour force was not part of the plan. America's recovery is still on, but the markets are reeling after the jobs market veered so wildly off script."

The sheer shock of the poor numbers of jobs created has implications for the strength of the US dollar and fears that deflation is a real possibility.

A weakening currency can be a catalyst for deflation as consumers hoard their wealth rather than spend it.

To put the US economy on a sustainable path of growth, a healthy dose of inflation is needed to lift everything from wages to investment.

"There was some confusion in the market over US jobs data this afternoon," said Alex Edwards, head of the corporate desk at UKForex.

"Markets were uncertain how to react at first, but the USD is losing ground now and GBP/USD is closing in on a break of 1.65.

"Although the unemployment rate is getting close to the Fed's threshold for a review of interest rates, they will be looking closely at the weak payrolls number and will still view this data as inherently weak – not good for the USD."

However, Gautam Batra, Managing Director and Investment Strategist at Signia Wealth, said that the disappointing jobs figures will not slow down the winding down of quantitative easing.

"Despite today's US employment data the Federal Reserve is likely to further reduce asset purchases at their meeting later this month," he said.

"As the year progresses eyes will turn to the inevitable end of quantitative easing, a policy that has been a significant factor in dampening financial market volatility.

"The path is laid out for long term US interest rates to continue their march higher and we can expect to see equity markets impacted by the prospect of withdrawal of liquidity. The US dollar should remain resilient given a more supportive policy backdrop."