The August Jobs Report released on Friday by the Bureau of Labor Statistics surprised economists with its weak job growth number. Only 142,000 non-farm payroll jobs were created in August, well below the expected estimates of 225,000. This value breaks a six-month streak of job growth reports over 200,000 and seems to contradict a run of relatively positive economic indicators. The June and July revisions reflected a total downward adjustment of 28,000 jobs.
Even the bits of good news were tarnished by underlying bad news. The unemployment rate dropped slightly from 6.2% to 6.1% and the long-term unemployed dropped to 31.2% of the total unemployed, but one of the main reasons was from workers leaving the workforce. The labor force participation rate dropped from 62.9% to 62.8%.
While the report was unexpectedly poor, economists are currently treating this as an aberration to be adjusted out, and there may be good reason to believe that. Retail jobs were down by 8,000, but the temporary effect of the Market Basket grocery store strike in the Northeast accounts for that drop. Further, the payroll processor ADP’s private employer’s report from the previous day showed 204,000 jobs created, more in line with expectations.
It is not unusual for August job reports to be unusually low and then revised upward in September – the August 2013 numbers rose in each estimate from 169,000 to 193,000 to the final 238,000. A similar revision in 2014 will put the job numbers back on the same general track. Nevertheless, the estimates were so far off that analysts are looking at numbers like the upcoming week’s retail sales figure with a little more critical eye.
Across the pond, the European Central Bank (ECB) introduced the second surprise of the week by not only reducing the benchmark interest rate to a paltry 0.05% (down from 0.15%), but also announcing that the ECB is preparing to buy asset-backed securities – taking steps toward the sort of quantitative easing that the Fed has almost completed.
With multiple nations in the Eurozone and different restrictions, it is difficult for the ECB to engage in government bond buybacks as the Fed did in the U.S. – thus the stimulus begins with asset-backed securities.
Effectively, the ECB is trying to encourage lending by banks by allowing the loans to be securitized, hoping to increase overall lending to businesses by banks and to inject more money into the market. The flat European growth in the second quarter appears to have spurred more rapid action.
Even though the announcement is vague and contains no important details – for example, the size of the stimulus – the reaction was immediate in the markets. Stocks rose in both the U.S. and Europe, and the euro sank against the dollar.
Almost certainly, this poor jobs report will not spur the Fed into raising interest rates. The most positive number was the six-cent wage increase to a $24.53 average, and that is not enough to exert inflationary pressure. It brings the year-over-year wage growth to 2.1%, which is comparable to the inflation rate.
Between the jobs report and the ECB’s actions, it seems likely that stocks are still going to be the best bet for investors for some time, and the combined benefits may even help stocks to break the typical trend of September losses.
Another reason to keep an eye on the ECB action is its effect on the Euro-USD exchange rate. Once the ECB releases details, the longer-term effects on the exchange rate should be clearer. Be prepared to adjust your investments accordingly if they will be affected by a further significant change in the exchange rate.