September Jobs Report Shows Surprising Weakness
Did Halloween come early? The September jobs report from the Bureau of Labor Statistics was certainly frightening by many economists' standards. It contained virtually no treats and an excess of tricks. By the end of the day, most analysts and financial reporters were reaching for their thesaurus for new and interesting ways to express "awful."
Only 142,000 jobs were created in September, far below the median Bloomberg estimate of 203,000 new jobs. On top of that, July and August numbers were revised downward by a total of 59,000.
Successive months of disappointing job numbers have dropped the job growth average for the year to just below 200,000 per month, and over the last three months, job growth has averaged only 167,000 per month. The fourth quarter would have to be stunning in order to match 2014's average monthly job growth of 260,000.
Stocks shrugged off the news, as the Dow dropped 258 points upon the announcement yet ended the day up 200 points.
Perhaps the report isn’t as frightening as it looks. Let's take a deeper look at this "awful" report and see if there are really are any treats hidden among the tricks.
Unemployment, Wages Hold Steady
While job growth was disappointing, the unemployment rates were not. Unemployment remained at 5.1% for the second month in a row. However, the U-6 unemployment rate that includes "marginally attached workers and those working part-time for economic reasons" dropped significantly to 10.0%, the lowest reading since May of 2008. The number of part-time workers seeking full-time employment dropped by 447,000 to 6 million workers, down from the grim peak of almost 9.3 million in 2010 but well above the pre-recession number of 4.6 million.
Meanwhile, after three consecutive months at 62.6% the labor force participation rate dropped to 62.4%, its lowest reading since 1977. The employment-population ratio, or the share of the working-age population with a job, dropped to 59.2% after eight months of relatively stable readings.
Average earnings were slightly lower, with a 1-cent drop in the average wage to $25.09 per hour. That follows a 9-cent rise in August, which produced the best average earnings number since January.
So fewer jobs are being created, and fewer people are in the market seeking them. Employers are effectively absorbing more workers off the sidelines and converting more from part-time to full time employment. This combination keeps the unemployment rate constant and does not produce upward pressure on wages. Take out monthly fluctuations, and this scenario equals the same slow growth recipe we have been looking at for months.
The Fed looks at the U-6 numbers and labor participation rate numbers and sees slack in the employment market that must be taken up — but should they? The Congressional Budget Office (CBO) suggests yes, to a point. CBO estimates that around half of the drop in labor force participation is due to retirement, as the large baby boomer population hits retirement age, and that approximately one-third is due to economic conditions.
A New Equilibrium?
It's probably time to ask whether we are reaching a new economic equilibrium that challenges some economic benchmarks and assumptions — for example, the relationship between unemployment, wage pressures, and Fed policy.
While wages are stagnant on average, the phenomenon is not uniform. Andrew Chamberlain of Glassdoor Economic Research points out that workers in skilled fields like financial services and construction have averaged double-digit wage growth while those in manufacturing and retail are seeing effective wage declines.
There may simply be a skills mismatch between many job openings and the remaining available pool of workers to fill them. If that's the case, Fed policy isn't going to solve that problem and drive unemployment even lower. Low interest rates can make it easier to borrow money and start a business but they cannot create a specific type of job. As the unemployment rate runs closer to full employment, Fed policy would have less impact.
It's Time to Raise Rates
Naturally, with a dismal job report comes the stampede of Fed watchers now predicting a rate hike delay until 2016. Paul Ashworth of Capital Economics: "The chances of a rate hike by the Fed this year just went way down." Diane Swonk of Mesirow Financial points out that Fed Chair Janet Yellen had "really made it clear that she'd like to re-engage those sidelined in recent years by allowing the unemployment rate to fall below what most consider full employment."
There are two huge assumptions involved: that continued near-zero Fed rates can achieve this goal, and that the Fed should even try.
Let's assume they succeed. Since 1974, there have only been two periods with unemployment rates below 5.0%: from mid-1997 to 2001 and mid 2005-early 2008. Those are periods of high growth during run-ups to stock bubbles and economic crashes.
The U-6 roughly correlates to both segments, with 1998-2001 as the only period below 8% since BLS data began in 1994 and mid 2005-early 2008 in the 8%-9% range. Corresponding Fed rates were well above todays near zero rates. It may be that 5% unemployment and 10% U-6 unemployment should be the true target for economic stability. It may also be the best that can be hoped for regardless of what the Fed does.
Enough already. It's time to raise the rates slightly and start normalizing fiscal policy. We won’t be surprised if that doesn't occur until 2016 based on the current market psychology, but a December hike makes more sense in the broad scheme.
We won't be surprised if the terrible jobs report and alleged interest rate delay is replaced by a decent jobs report in October or November that starts an equally fervent declaration that the economy is back and rates should be raised immediately. Did we say "enough already" already?
We have been in a period of slow growth for some time, and are likely to continue to be for months, if not years, regardless of Fed policy. Domestic consumption, housing, and consumer confidence have all improved but are being offset by slow overseas growth. Consumption drives the economy, and it seems likely that slowly improving consumption will produce continued slow improvement in jobs with significant monthly variations. Slow and steady are the key words. We suggest taking a similar approach with your portfolio. Re-evaluate and adjust, but don't overreact.