The Bureau of Labor Statistics (BLS) released a strong labor report last week, showing the unemployment rate dipping to 5.9%—its lowest level since the summer of 2008. Not only were 248,000 jobs added, but the previous two months were also revised upward to add another 69,000 jobs. The gains were relatively broad and substantial across almost all sectors.
The number of unemployed dropped to 9.3 million Americans, a drop of 329,000 from August. Meanwhile, the total number of people receiving unemployment benefits is at an eight-year low, and new benefit requests are at a seven-year low.
All of this points to continued strength in the economy, leading to the inevitable speculation that the Fed will raise interest rates. Analysts will be combing through the upcoming release of Fed minutes for further clues.
Yet we believe a raise in interest rates is still unlikely to happen soon – for two reasons.
While the steady increase in jobs is a great sign of positive economic growth, wages are still stuck in the mud. Average hourly earnings are essentially unchanged in September (they actually dropped by a penny). The decrease in unemployment has not yet led to any sort of upward wage pressures.
Perhaps the reason why is because there is still a large slack pool of underemployed or those who have left the workforce that could enter back into the force under the right conditions. Involuntary part-time workers are still quite high at 7.1 million (although this number was unchanged in September). 2.2 million persons are still classified as marginally attached to the workforce, and the U6 unemployment rate including these categories is still rather high at 11.8%
Another 100,000 people stopped looking for work, dropping the labor force participation rate at a disappointing 62.7% – the worst in over 36 years.
Fed Chairwoman Janet Yellen has made it pretty clear that she believes further reductions in the slack in the labor market must take place and that wages must begin to rise before interest rates should be raised – and those are the only two negative aspects of the job report.
Most analysts are predicting continued job growth over 200,000 per month, and Wall Street will likely react positively to every single one of them. However, even with positive reports, there needs to be some indication of wage increases to make the Fed take action before the middle of next year.
The eventual rise in interest rates may well be what finally halts the surge in the stock market, but at this point, that seems unlikely to happen before the expected mid-2015 timeline.
One could make an argument that interest rates have been held artificially low for so long now that the market is broadly overvalued, and that, when rates do rise, the correction is likely to be sharper as a result. Oddly, since everybody expects the Fed to act and the market to correct eventually, the enthusiasm has been somewhat tempered. Geopolitical instability has also acting as a governor to slap the market back down periodically.
In the short term, you are probably better off to watch the news for any potential large scale shocks – for example, should Ebola show any significant signs of spreading in the U.S. (or any other advanced economy), all bets are off on short-term economic stability and growth. It will take a stunning job growth number in either direction to make the Fed act quickly; moderate growth will not do the trick.
Meanwhile, it seems best to hold on to your equities until we get into the early part of 2015, and re-evaluate the Fed’s attitude at that time.