The U.S. jobs report for August released Sep. 6 illustrates perfectly why Federal Reserve policymakers are divided over whether and when to start reining in the central bank’s stimulus. It is full of inconclusive signals.
The headline jobs growth for the month, at 169,000, was 11,000 below expectations. A disappointment, but not a crushing one, and comfortably within the statistical margin of error. However, the estimates for June and July were revised down in aggregate by almost seven times that number. The August unemployment rate fell to 7.3% from 7.4%. The black cloud to that silver lining? The decline was driven by people dropping out of the counted workforce, having given up looking for jobs. The percentage of Americans in the labor force has now fallen to 63.2%, its lowest level in three and a half decades. Nonetheless, the unemployment rate is down from its peak of 10% in October 2009.
Does all that add up to the “substantial improvement in the labor market” the Fed has set itself as a precondition for starting to taper its massive asset-buying program? When policymakers meet later this month that is one question they will have to ask themselves. Another is whether there are other sufficiently encouraging signs of the economy picking up to offset a weak monthly jobs report, even if it is unclear at this point quite how weak, or not, that report is (and initial monthly jobs estimates, which is what the August numbers are, are notoriously prone to revision).
As this chart shows, the unemployment rate has bounced around either side of its trend line, even though the downward trend has been clear. All summer there has been intermittent softness in the economic indicators. We would hazard that this latest report won’t deflect the Fed from its baseline economic forecast, or from deciding this month to start tapering; tapering, note, not tightening. This prediction holds even if the Fed doesn’t resolve its internal debates about whether the unemployment rate can keep coming down despite sub-par growth — and how much other support the economy will still need, and for how long, in the absence of quantitative easing.