Will They or Won't They?
Jobs reports are often highly anticipated by investors, but the August jobs report held even greater significance than usual. Investors hoped for a clear signal that the Federal Reserve would be expected either to raise rates during their September meeting or put off a rate hike until at least December. Unfortunately, the jobs report contained mixed signals, producing uncertainty about the Fed's actions — and markets hate uncertainty.
Given a string of relatively good economic news heading into August, most economists expected the Fed to act and raise interest rates slightly in September. Three weeks of world market chaos followed, spurred by apparent weakness in China. With the US economy on a relative roll compared to world markets, the question shifts to whether overseas economic negatives can overcome domestic positives in the eyes of the Fed.
Since Fed Chairman Janet Yellen has stated that slack in the job market is a major factor in the decision to raise rates, it was hoped the jobs report would be a tiebreaker. Experts are now split about what the Fed will do given the lack of clear direction.
Fewer Jobs Created With Lower Unemployment
The headline in the New York Times says it all: "Jobs Report Gives Ammunition to Both Sides of Fed Rate Debate." That's technically true, but the majority of the ammunition seems to lie with the optimists instead of the pessimists.
The one major negative is the main headline — the number of jobs created. Only 173,000 jobs were created in August, significantly below the estimates of 220,000 jobs. Pessimists might also note that the labor participation rate is still very low at 62.6%, the lowest number since October 1977 (although that represents just over 142 million total non-farm employees today compared to just over 82 million in 1977). There are still a large number of people that simply aren't trying to find jobs, contributing to lower unemployment rates.
However, those lower unemployment rates lead the positive results. The unemployment rate dropped to 5.1%, and the broader U-6 unemployment rate that includes "marginally attached workers and those working part-time for economic reasons" fell to 10.3%. Both numbers are the lowest since 2008. At least a few more people are looking for work, and more of those who are looking are succeeding. Unemployment of 5% traditionally has been considered close to full employment and a trigger for inflationary pressures.
Wage increases reached 0.3% over July, constituting a year-over-rise rise of 2.2% — slightly better than the Bloomberg estimates. Those aren’t world-beating numbers, but they are the best since January. At the same time, aggregate weekly hours increased 0.4%. More hours at higher wages multiplies the effect on take-home pay.
Even the headline is not as bad as it appears. June and July numbers were revised upward by a total of 44,000 jobs. Add those to the 173,000 reported in August and that makes 217,000 jobs — close to the 212,000 average monthly job creation throughout 2015.
As the icing on the optimist's cake, August is historically underreported and revised upward because of seasonal factors. Joe Lavorgna of Deutsche Bank had predicted 170,000 jobs, noting that out of the past 27 years, the initial August jobs numbers were below the consensus forecasts 21 times.
Thumbs Down, Says the Market
Investors seem to agree with the economic optimists and think that a rate hike is likely based on market reaction. The Dow dropped 270 points within the first hour of Friday's trading and ended up down 272 points, the NASDAQ finished down 49 points, and the S&P 500 finished down 29 points.
It's also possible that investors are accepting that a rate increase is coming sooner rather than later, and even if it doesn't show up in September, it likely will by December. The eventual rate rise is almost certain to be low, but the effect on the market is hard to predict. The initial reaction to the job reports suggests that the market is partially pricing in the effect of a rate hike.
Domestic or International: Which Factors Will Prevail?
Fed watchers are parsing words to find out whether the shaky world economic situation, especially that of China, will override the mostly strong economic news. Again, there are quotes that seem to support both sides.
Eric Rosengren, president of the Boston Fed, said with respect to the recent market unrest, "In my view, these developments might suggest a downward revision in the forecast that is large enough to raise concerns about whether further tightening of labor markets is likely." Narayana Kocherlatoka, president of the Minneapolis Fed, said in a speech the day before the jobs report was released that the need to facilitate further labor improvement "argues against raising the Fed funds rate in 2015."
Meanwhile, Richmond Fed President Jeffrey Lacker gave a speech on Friday with a title that says it all, "The Case Against Further Delay." Lacker indicated he would dissent if a rate increase were delayed beyond September. St. Louis Fed President James Bullard has supported raising rates and said "market volatility shouldn't delay action."
In essence, the jobs report isn't likely to change the mind of most Fed members, whether they lean for or against action. It's possible that further economic degradation in China that leads to US volatility might affect some opinions, but the camp for raising rates seems to be gaining strength.
Predicting the Fed's actions is tricky business, and as a long-term investor, you shouldn't even try. Unless you need access to your retirement funds in a short timeframe, stick with your portfolio plan and use periodic market dips as an opportunity to review your portfolio, rebalance if needed, and look for potentially undervalued bargains.
Regardless of what the Fed does, the market is going to remain volatile for the near future as the world economy seeks a new equilibrium. It's entirely possible that a Fed rate increase will have less of an impact than events in China, simply due to predictability. With the Fed, we know what will happen but we don’t know when. With China, we don’t know what will happen, when it will happen, or even why it happened.
Fasten your economic seatbelts for a rollercoaster ride over the next few months, and remain calm. Getting scared and jumping out of the market during volatile times is likely to have the same effect as jumping out of a real rollercoaster. You're highly likely to get hurt.