August Jobs Report Won’t Change Minds at the Fed

 

shutterstock_111386480I tend to divide folks who talk about economics publicly into two camps: Those that comment after watching the news, and those that read actual reports about the data they’re discussing. If you just watched the news this morning what did you hear? This. If you actually read the report, you’re my kind of people.

This morning’s jobs report has a headline number that will tell you the job market was weaker than expected, rising 173,000, about 50,000 below what was anticipated. Now you’d think that alone would strengthen the argument that the Fed will not raise interest rates at its September 16-17 meeting. But the market swooned at the open, meaning market participants see this report as positive. And it was.

  1. Data revisions to June and July leave the last three months averaging 221,000, about where you would expect. There is substantial discussion of the likelihood of sharp revisions that tend to happen in August, too, so there was some discounting of a low payroll number in advance of the announcement.
  2. We not only got lower unemployment — a 5.1% reading — but we got it for the right reasons. The employment-to-population ratio ticked up, the number of people unemployed fell, and so did the number of discouraged workers. The U-6 rate was down to 10.3%, the lowest in 7 years.
  3. Private sector wages moved up 8 cents, continuing a good run. They’re up 2.1% from a year ago and weekly earnings are up 2.5%.  Average weekly hours ticked up a tenth too.

Shortly after the report, Richmond Federal Reserve president Jeffrey Lacker spoke to a group of retailers to explain why he thinks we still have to lift rates. While he did not directly comment on this morning’s report in those remarks, he said later that the report did not change his mind. I expect this report not to change anyone’s mind, though it will be used in the statements to justify whatever they had already decided to do. I will be very surprised if anyone says “this report made me change from hike to no hike,” or vice versa. There’s not enough here.

I’m still inclined to think rates will go up in the September meeting and then hold there for the rest of the year.  There is enough support among Fed officials, and to delay further after Ms. Yellen said the unemployment rate is the thing she watches most would damage her credibility. She is also watching the calendar, knowing that rate changes a year from now — in the midst of a presidential election — will be harder to make. Get while the getting’s good.

Published in Economics, General
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  1. BrentB67 Inactive
    BrentB67
    @BrentB67

    King, great analysis.

    The forecast or expectations for this data point are a part of the problem. The opinions used to form the estimates vary widely.

    The revisions to this data point are important as you highlight. The BLS emphasizes that each report is P for preliminary. Similar to GDP, this is a first look and there are probably two revisions coming and I am willing to bet both of them will revise the data higher.

    Absolutely agree with your point about not raising rates in an election year.

    I think William Dudley at last Thursday’s press availability left the door open for the FOMC to consider international issues at the next meeting. Because of that I think the ECB’s comments yesterday would have more of an influence on the FOMC than today’s jobs repot.

    • #1
  2. Hoyacon Member
    Hoyacon
    @Hoyacon

    Thanks King.  Very helpful and insightful.

    • #2
  3. philo Member
    philo
    @philo

    King Banaian: …would damage her credibility.

    Now that’s funny.

    • #3
  4. King Banaian Member
    King Banaian
    @KingBanaian

    philo:

    King Banaian: …would damage her credibility.

    Now that’s funny.

    I had wanted to write that as “…would damage her credibility (further)” but thought it too tendentious.  I do believe they’ve waited too long already and that they will end up chasing the yield curve up.  The question is how long that goes before we see a recession.  It’s usually about 18-24 months from here, so it may end up happening just after the election rather than before.

    • #4
  5. King Banaian Member
    King Banaian
    @KingBanaian

    BrentB67: I think William Dudley at last Thursday’s press availability left the door open for the FOMC to consider international issues at the next meeting. Because of that I think the ECB’s comments yesterday would have more of an influence on the FOMC than today’s jobs repot

    If so, it will be to cover their backs on delaying the rate rise to December, which Dudley wants very much.

    • #5
  6. AldenPyle Inactive
    AldenPyle
    @AldenPyle

    This is an excellent post, both thoughtful and thought provoking.

    I agree with the general thrust of the article that this jobs report changes very little about the decision to raise rates. The main argument for “normalizing” rates is that the labor market has recovered. I think policymakers at the Fed agree that the labor market is slowly improving which this confirms. In any case, individual jobs reports have a lot of noise and measurement error, so outside of a major swing in either direction, one report would have little impact.

    The main counter-argument for rate rises is that inflation is below target, decelerating, and indicators of future inflation expectation  are also below target as far out as you want to go.  This seems to be the real issue for dispute. News on the inflation front, thus, seems to have a greater potential for changing the likelihood of Fed action. Interestingly, the next CPI report should be released the morning of the next Fed meeting. An acceleration of that inflation indicator or significant movement in TIPS spread would probably have the most impact.

    • #6
  7. AldenPyle Inactive
    AldenPyle
    @AldenPyle

    A couple of quibbles. As Mr. Banaian indicates in the comments, the monetary policy decisions of this fall are probably the last ones that will impact economic conditions enough to sway the election (unless you think the Fed tightening cycle will crash the stock market).  So, actually, there is probably a political cycle reason that interest rate decisions will be put off to December as I suspect.

    Second, I dont think I would describe 2% wage growth as a good run. More like not so horrible by the terrible standards of the 21st century.

    • #7
  8. philo Member
    philo
    @philo

    King Banaian:

    philo:

    King Banaian: …would damage her credibility.

    Now that’s funny.

    I had wanted to write that as “…would damage her credibility (further)” but thought it too tendentious.

    But that would have deprived me of my one really good chuckle today. Thanks.

    • #8
  9. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    Private wage growth is anemic.  It’s nowhere near the historical rates, and it’s way below 2009 rate.  It’s been 6 years.  The numbers are just noise in a long, slow, shallow slope up.  More below.

    fedwwafes.png (736×527)

    • #9
  10. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    Median household income continues to stick to lows well below 2007.  This is not a sign of recovery.  It’s not a sign of anything when the new employment numbers print 50K lower than expectations, and we know that the “adjustment” done is baked into expectations.  Which means those numbers just get moved around at times, which makes them fairly suspect – and a longer average should be looked at that smooths out those bumps.

    ZIRP has propped up stock prices but the economy does not recover from those pricings, nor does investment necessarily follow if the companies flush with cash estimate low ROI on new spending.  There’s a reason why wages are low – it’s a buyer’s market for labor.  You’ll know recovery has come around when you see six months of significant median household income growth happening.

    Screenies courtesy of https://confoundedinterest.wordpress.com/

    mulch.png (736×527)

    • #10
  11. BrentB67 Inactive
    BrentB67
    @BrentB67

    King Banaian:

    BrentB67: I think William Dudley at last Thursday’s press availability left the door open for the FOMC to consider international issues at the next meeting. Because of that I think the ECB’s comments yesterday would have more of an influence on the FOMC than today’s jobs repot

    If so, it will be to cover their backs on delaying the rate rise to December, which Dudley wants very much.

    Agree and that was my point. I wrote a post including his press conference and how it helped motivate the crude oil market.

    • #11
  12. King Banaian Member
    King Banaian
    @KingBanaian

    If you’re interested, you can listen to me discuss this post on my radio program this (Saturday) morning, 9-11 CT, from this link.  Replays Sunday, same time.

    • #12
  13. King Banaian Member
    King Banaian
    @KingBanaian

    Chris Campion: Private wage growth is anemic. It’s nowhere near the historical rates, and it’s way below 2009 rate. It’s been 6 years. The numbers are just noise in a long, slow, shallow slope up.

    Well, I would disagree because you are using a wage number that does not include benefits.  What we think of as anemia is in fact a product of having pay increases sent to benefits instead.  Look at real compensation per hour:

    real compensation per hour

    • #13
  14. The Reticulator Member
    The Reticulator
    @TheReticulator

    King Banaian:

    Chris Campion: Private wage growth is anemic. It’s nowhere near the historical rates, and it’s way below 2009 rate. It’s been 6 years. The numbers are just noise in a long, slow, shallow slope up.

    Well, I would disagree because you are using a wage number that does not include benefits. What we think of as anemia is in fact a product of having pay increases sent to benefits instead. Look at real compensation per hour:

    Interesting.  Do you know how much of that includes ObamaCare benefits?

    The next thing would be for someone to study how much of the benefits include mandated benefits that nobody who had a choice would buy.

    • #14
  15. AldenPyle Inactive
    AldenPyle
    @AldenPyle

    The Reticulator:

    King Banaian:

    Chris Campion: Private wage growth is anemic. It’s nowhere near the historical rates, and it’s way below 2009 rate. It’s been 6 years. The numbers are just noise in a long, slow, shallow slope up.

    Well, I would disagree because you are using a wage number that does not include benefits. What we think of as anemia is in fact a product of having pay increases sent to benefits instead. Look at real compensation per hour:

    Interesting. Do you know how much of that includes ObamaCare benefits?

    The next thing would be for someone to study how much of the benefits include mandated benefits that nobody who had a choice would buy.

    The main difference is that the second series is adjusted for inflation. There was indeed an acceleration of wages in the first half of this year, though that is tapering off. When coupled with the passthrough of lower energy and other commodity prices, this meant that workers observed a significant increase in their purchasing power for the first time in a close to a decade.

    Given this atrocious medium term performance, there seems to me to be a lot of slack left in the labor market (unless the Fed’s goal is to have no increase in real wages ever).

    • #15
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