Labor Day Jobs Report

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This was a Jobs Report Friday, and I tend to get a little wonkish about the monthly jobs reports, mainly because I believe jobs are pretty much the most important part of the economy; we’ve even set aside a holiday to recognize the importance of labor. Today’s report is especially important because it comes right before a Federal Open Market Committee Meeting where the Fed just might raise interest rates.

The US economy added 173,000 jobs in August, and the unemployment rate dropped to 5.1%. While this was the smallest increase in new jobs since March, the June and July numbers were revised higher by 44,000 jobs. The Labor Department said 245,000 new jobs were created in July instead of 215,000. June’s gain was revised up to 245,000 from 231,000. The 173,000 new jobs missed estimates of 210,000 to 220,000 but the August numbers are notorious for underestimating – only to be revised higher in following months. The unemployment rate of 5.1% is down from July’s 5.3% rate, and beats estimates that the rate would hold steady.

Between 2005 and 2014, August was the month with the lowest first estimate for job growth relative to revisions that were published in the employment reports for the subsequent two months. Over that period, on average the government found 58,000 more jobs added to payrolls in August than initially figured. Job growth in August was revised lower only in 2005 and 2008. One reason why August is difficult to calculate is because it marks the start of the school year, which varies from town to town.

So, one way to get a better grasp on the numbers is to look at longer-term trends. Over the last three months the economy added 221,000 new jobs on average – fairly solid gains. In August, the year-over-year change was over 2.9 million jobs – again, fairly solid gains. The economy has been adding jobs every month going back to March 2010 – a nice streak. The U.S. has added an average of 212,000 jobs a month in 2015 and the economy is on track to generate more than 2 million jobs for the fifth year in a row.

The bulk of the hiring in August, one-third of all new jobs, took place in health care. Healthcare added 56,000 jobs; Professional and business services added 33,000 jobs; employment in eating and drinking places gained 26,000 job; financial firms hired 19,000; retail added over 11,000, wholesale trades hired almost 8,000, construction gained 3,000. Government hired 33,000 workers and it looks like the declines in government hiring are now over. Federal payrolls were unchanged in July, and Federal employment is up just 6,000 year-to-date. Mining and logging, an industry that includes oil exploration and drilling, lost 10,000 jobs; and manufacturing was the big loser – down 17,000 jobs for the month.

The average hourly wage paid to American workers rose 8 cents, or 0.3%, in August to $25.09 an hour. From August 2014 to August 2015 hourly wages rose 2.2%, matching the best gain of the past four years. The Federal Reserve has targeted a 2% rate of inflation, but in the 12-months through July, the Consumer price Index climbed just 0.2%. This means that workers are seeing wage increases that are running faster than inflation – that means real gains – but wage pressure has not been strong enough to push inflation throughout the economy.

But there is another, shorter-term trend in place: wage gains in the past 3 months have only been running at 1.9%. The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.6 hours in August. The manufacturing workweek was unchanged at 40.8 hours, and factory overtime edged down by 0.1 hour to 3.3 hours.

Full-time jobs climbed to 122 million, exceeding the prior peak reached in November 2007. The U-6 unemployment rate fell to 10.3%, the lowest level since June 2008; U-6 includes unemployed plus underutilized workers, or people working part-time for economic reasons, plus discouraged workers who aren’t counted under the U-3 measure, or the headline number.

The headline or U-3 unemployment rate doesn’t capture workers who, because of a difficult job market, have stopped looking for work.  The labor force participation rate – the share of the population that is either working or actively looking for work – dropped off sharply during the recession, from about 66 percent to about 63 percent.  While some of those folks left for retirement, others–maybe a third to a half by some measures–can be enticed back into a more welcoming job market.

The nation’s unemployment rate, meanwhile, fell to 5.1% from 5.3%, marking the lowest level since April 2008. The jobless rate is determined by a separate survey of households that showed a sharp 237,000 drop in the number of people who said they were unemployed. Only a smattering of people dropped out of the labor force. The labor force participation rate was unchanged at 62.6% – which is still a historically low rate. There are 2.19 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 2.18 million in July.

What this means is that there are still lots of potential workers ready to jump back in the labor pool and it is possible that the economy could add new jobs, but see the unemployment rate move higher as workers are encouraged to look for work.

In less than 2 weeks the Federal Open Market Committee will meet to determine monetary policy, and the strength or weakness of the labor market will be a major factor in their deliberations. The Fed has set a target of 5.2% unemployment as the level that might warrant a rate hike, but that won’t be their only concern. An increase seemed all but certain just weeks ago before the stock market’s slide amid fears of a softening Chinese economy and stagnant growth worldwide. Janet Yellen has repeatedly suggested the FOMC was waiting to see data showing a sustained economic recovery.

In a speech just before the jobs report, Richmond Fed president Jeffrey Lacker said the labor market supported the case for raising rates sooner rather than later. But this report was unlikely to “materially alter the labor market picture or, for that matter, the monetary policy outlook.”

Fed-funds futures, used by investors and traders to place bets on central-bank policy, showed Friday a 34% likelihood of a rate increase at the September meeting, compared with 27% before the jobs report. The odds had been around 50% a month ago.

Finance ministers and central bankers of G20 member states have gathered in Ankara, Turkey today. The  Federal Reserve is coming under pressure from emerging markets not to raise rates too soon as turmoil in China threatens global growth, but the G20 will not publicly call for any delay. This G20 comes at a very good time because it gives the Fed an opportunity to gauge all the elements at stake.

In addition to China and emerging markets and all the other concerns, the Fed will likely consider the impact on Wall Street; back when the Fed hinted at ending Quantitative Easing, Wall Street threw a Taper Tantrum. And as the Fed has been inching closer to raising interest rates, Wall Street has thrown what might be called a Rate Ruckus, (you’re welcome to come up with a better name if you wish). In the U.S. stock market, the S&P 500 had its sixth decline exceeding 1 percent in 12 days.

Prior to that there had been 10 such declines since January. The benchmark gauge has moved up or down by an average of more than 2 percent a day since falling out of its 2015 trading range on Aug. 20; almost four times as much as in the prior nine months. September is historically the worst month of the year for the S&P 500, with the equity gauge falling 1.1 percent on average based on data going back to 1927. So, you could blame the declines today on anything, including history, but part of it was a Rate Ruckus.

And there are plenty of reasons why the argument can be made that more needs to be done to improve employment: the Labor Force Participation rate is too low, wages aren’t going up enough, millions have just given up on the prospect of a job, and the jobs created are not quality jobs. The current pace of job growth would result in an extremely low unemployment rate of 4.2% a year from today, with other factors such as labor-force participation held constant. The rate has dropped by about a percentage point over each of the last four 12-month periods.

So even though the Fed targeted 5.2%, as if this is the magical full employment rate, it doesn’t paint a complete picture. The unemployment rate says “raise!” The payroll number says “hold!” The markets will whine and complain no matter what the Fed does.

This month’s jobs report showed signs of strength and signs of weakness, along with very little clarity. One month’s job data is not enough to seal the deal one way or the other. The Fed could just as easily claim victory with the unemployment rate at 5.1%. And like T-Ball athletes, everybody gets a trophy. For many on Wall Street, they can’t imagine a rate hike; after all, it has been almost 10 years since we’ve seen one, so there are actually traders on Wall Street who have not seen a rate hike from the Fed. It’s like the anticipation of ripping off the Band-Aid is worse than the actual act. At a certain point, and we don’t know where that point is, the Fed will likely just raise rates; just do it and be done. That’s my guess.

The Financial markets will be closed on Monday. So, have a safe and happy Labor Day holiday weekend.