US Job Growth Slowed in August, but Outlook Remains Positive

US Job Growth Slowed in August, but Outlook Remains Positive

After two months of strong growth in the labor market, the US created fewer jobs than expected in August, with nonfarm payrolls growing by only 151,000 jobs and unemployment holding steady at 4.9 percent. This news is likely to diminish expectations of an interest rate hike by the Federal Reserve in the coming month, Reuters reports:

The report comes on the heels of news on Thursday that the manufacturing sector contracted in August, which had already cast doubts on an interest rate hike at the Fed’s Sept. 20-21 policy meeting. “This mixed jobs report puts the Fed in a tricky situation. It’s not all around strong enough to assure a September interest rate hike. But it’s solid enough to engender a heated policy discussion,” said Mohamed el-Erian, chief economic adviser at Allianz, in Newport Beach, California.

Economists polled by Reuters had forecast payrolls rising 180,000 last month and the unemployment rate slipping one-tenth of a percentage point to 4.8 percent. Last month’s jobs gains, however, could still be sufficient to push the Fed to raise interest rates in December. The rise in payrolls reinforces views that the economy has regained speed after almost stalling in the first half of the year.

The weaker numbers, however, don’t necessarily indicate an impending economic slowdown:

The smaller-than-expected rise in payrolls also likely reflects difficulties adjusting the data for seasonal fluctuations related to school calendars. Over the last several years, the government’s August payrolls estimates have been weak only to be subsequently revised higher.

“As the August numbers have tended to come in on the softer side in the past, we think that this mostly reflects seasonal adjustment problems rather than underlying weakness,” said Harm Bandholz, chief economist at UniCredit Research in New York. “The report thus leaves the Fed on track for a rate hike in December. September seems to be off the table now.”

Noting that politicians can find ways to spin the numbers both positively and negatively, FiveThirtyEight’s Ben Casselman calls the report better than it looks:

[E]conomically, the jobs report probably deserves more credit than suggested by Friday’s headlines (“Jobs report whiffs,” blared Business Insider). Not because it was great – it wasn’t – but because if this is what a “whiff” looks like, the economy is in pretty solid shape. Over the past year, employers have added more than 2.4 million jobs and raised hourly pay by 2.4 percent (amid inflation that’s running at 1 percent per year or less), all despite a slowing global economy and mounting political uncertainty at home. The one true whiff – May’s gain of a measly 24,000 jobs – quickly proved to be a blip.

None of that erases the serious issues that remain in the U.S. economy. More than 6 million Americans are working part-time because they can’t find full-time jobs, a number that has barely budged so far this year. Millions of Americans abandoned the labor force during the recession, and they are returning at a trickle, if that. Large groups of Americans – African-Americans, workers without a college degree, the long-term unemployed – continue to struggle. The trend lines, however, are headed in the right direction – and one month of disappointing-but-still-decent job growth doesn’t change that.

For the New York Times‘ Neil Irwin, the takeaway is that the US economy isn’t overheating, which isn’t bad news:

Indeed, the report is so consistent with the longstanding evidence of how the economy is doing that we probably wouldn’t care much at all about the August numbers if the Federal Reserve weren’t on the precipice of raising interest rates at its September policy meeting.

If there’s good news in the report, it’s not that the economy is doing any better than we thought, but rather that the numbers are consistent enough with expectations that bond traders can head to the Hamptons or wherever they plan to spend their Labor Day break. The Fed chairwoman, Janet Yellen, and her colleagues can safely do the same.

As for the Fed, Irwin argues that wage and hour trends point toward a need to keep rates low:

That 0.1 percent increase in average hourly earnings was not impressive. It was a three-cent increase in average hourly pay for private-sector workers, to $25.73 an hour, which represents a 2.4 percent gain over the last year. Year-over-year pay raises have been larger many times in this expansion, meaning that number doesn’t point to some acceleration in wage growth, but rather is, again, in line with the longstanding pattern.

More concerning, the average workweek actually fell in August, to 34.3 hours from 34.4. It could be an aberration and isn’t a big deal on its own. But if the job market were bursting at the seams, you would expect employers to be asking their workers to put in more hours, not fewer. Moreover, when you combine the shorter workweek with the very small hourly wage gain, average weekly earnings actually fell in August, dropping 0.2 percent to $882.54. Again, it’s nothing to panic over — but also evidence that the economy isn’t overheating in a way that the Fed needs to worry about.

The Wall Street Journal looks at the longer-term trend, which seems to show the labor market tightening:

U.S. employers have added jobs at a 182,000 monthly pace so far this year. That is down from average gains in 2015 and 2014—the best two years for employment growth since 1999—but is more than adequate in the view of many economists to absorb new entrants to the job market and keep the unemployment rate in check.

Some policy makers and economists expect hiring to moderate as the labor market tightens. … A tighter job market should support further wage growth and give Americans the ability to spend more. So far this year consumer spending has increased steadily and homes are selling at the best rate of the expansion.

But there are worrisome signs outside the job market. U.S. economic growth has held near 1% for three straight quarters, anemic gains even by the standards of the lackluster expansion. Business investment has decreased this year, corporate profits are soft and threats from economic weakness abroad still loom.

At the Washington Post, Ylan Mui points to a few reasons why the Fed might be reluctant to raise rates before December:

Some economists think the weaker-than-expected hiring last month could be enough to convince central bankers that they need more time to decide. “This is certainly not compelling, even by their own logic,” said Kevin Logan, chief U.S. economist at HSBC.

Another potential complication could be the U.S. presidential election. Though the Fed’s interest rate decisions are independent of the political process, many analysts believe officials would be loath to rock the boat before the vote in November. An analysis by Tara Sinclair, chief economist at job site and a professor at George Washington University, found that the Fed has only hiked rates in the two months before a presidential election once in the past 70 years.

But another economist tells the Guardian’s Jana Kasperkevic that it may be unwise to wait that long:

“I think they should hike in September,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi expected the US economy to add 150,000 jobs in September. “I think they’re running the risk that the longer they wait to normalize rates, the greater the odds that the economy overheats.”

Members of the Fed have made the same argument in the past when speaking with activists and lawmakers asking them to hold off on raising interest rates, which have been kept near zero since the 2008 recession. In December of last year, the Fed raised the interest rates for the first time in nearly a decade bringing the interest rate range to between 0.25% and 0.50%.