Jobs Report Points To An Anemic Economy, So Why Is The Fed Thinking Of Raising Rates?
The July Jobs Report indicates that while the economy is growing, it is not growing very much. This seems to call the Federal Reserve's interest rate plans into question.
July’s jobs report wasn’t exactly spectacular, but it wasn’t bad either. Instead, what we got was a report that was almost completely in line the forecasts that analysts had released earlier this week and one that shows the economy continuing to chug along at the same pace we’ve become used to since the recovery ended:
The American economy added 215,000 jobs in July, a respectable gain that could raise the comfort level of policy makers at the Federal Reserve as they consider the timing of their long-awaited move to raise interest rates.
“Solid enough to keep the September hike alive,” said Ian Shepherdson of PantheonMacroeconomics, in a note to clients shortly after the release of the data.
Although slower than the blockbuster pace of hiring in late 2014, the average monthly payroll gain in the first half of 2015 stood at more than 200,000 and the report from the Labor Department on Friday showed employers to be consistent last month.
The unemployment rate held steady, after a decrease to 5.3 percent in June, the lowest level in more than seven years. Before the report, economists on Wall Street had been predicting a gain of 225,000 jobs, with no change in the unemployment rate.
The Labor Department also revised upward the number of jobs added in May and June by a total of 14,000, bringing the average monthly gain over the last three months to 235,000. Although there was no change last month in the unemployment rate, which is based on a separate survey of households than the payrolls report, the pace of hiring is on track to bring the jobless rate below the closely watched 5 percent threshold in coming months.
Average hourly earnings rose 0.2 percent in July, about what was expected but better than in June, when wages were flat. Over the last 12 months, wages have risen at an annual rate of 2.1 percent, not much more than the underlying rate of inflation and one reason many workers remain frustrated with what has been a fitful recovery.
The average workweek also grew slightly, another sign the economy is maintaining some momentum after a slow start to the year.
Despite the overall healthy tone in the report, one negative was that the proportion of Americans in the work force did not bounce back in July after declining in recent months. At 62.6 percent, it remains at levels not seen since the late 1970s.
The strongest sectors for hiring included health care, retailing and professional and business services. The mining and logging sector lost 4,000 jobs, a sign of the pain in the oil patch as energy companies cut drilling and other exploration efforts. The public sector added 5,000 jobs, while private employers bolstering payrolls by 210,000.
Although more positive in recent days, economic data over the last few months has been uneven, with better numbers for trade and factory orders but a lackluster overall growth rate recorded in the spring months.
Meanwhile, sectors like professional services and construction have been hiring more workers lately, even as the energy sector sheds jobs as theprice of oil plunges.
These crosscurrents made the report on the labor market eagerly anticipated by traders and investors on Wall Street.
Although the net addition in payrolls was a bit below the consensus, the overall tone was slightly better than expected because of the upward revisions for May and June, and the increase in average hourly earnings and the length of the workweek, said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch
In most respects, this jobs reports isn’t all that dissimilar from those that we’ve seen over the past several months, and it suggests strongly that the economy isn’t as strong as the Federal Reserve seems to think it is. An additional 215,000 new jobs is nothing to sneeze, of course, but it hardly matches the 250,000 and more number that we need just to keep up with population growth. Additionally, the fact that hourly wages and the hourly workweek remain relatively stagnant suggests that employers aren’t likely to go on a hiring binge any time soon since they seem to have about the number of employees they need to be productive and profitable. The top-line unemployment number is relatively good, but when you dig down deeper you see that the broader U-6 measurement of unemployment remains stubbornly above ten percent and there still seem to be a large number of people who are working part-time largely because they cannot find full-time employment. Finally, the fact that labor force participation remains at levels unseen since the Carter Administration is a sign that there is still a significant segment of the working population that has basically given up on looking for a job. Admittedly, at least part of the drop in labor force participation can be explained by the fact that the Baby Boom Generation is retiring, but as I’ve said before and as other analysts have noted repeatedly that fact alone does not account for the drop-off in workforce participation since the Great Recession. Instead, it seems to be a sign of underlying weakness that could potentially be the spark of a new recession if other factors caused the economy to slow down.
Given all of this, the fact that the Federal Reserve seems to be on course to raise interest rates next months doesn’t really make any sense. By all indications, while the economy is growing it is nowhere close to being in or near the overheating stage where inflation worries would become a legitimate concern. Instead, it often seems as if the state of the economy is such that even a small disruption has the potential to have widespread effects. The best example of that can be seen in the first quarters for both 2014 and this year, in which economic growth slowed to a halt and contracted largely because of winter weather, which is something that is both largely predictable and not at all uncommon for most of the country. The same thing could happen if the Fed raises interest rates.Granted, the rise they’re contemplating isn’t very large but, combined with other factors including the weather and the ongoing decline in oil prices, it could end up hurting the economy more than it helps. Admittedly, the economists at the Fed who make these judgments have far more information available to them than we do, but looking at it from the outside this just doesn’t seem like a good time for an interest rate hike. These are not minor concerns. Slower economic growth would effect all of us in one way or another, and a weaker economy could have a profound impact on the 2016 elections. The Fed seems intent on raising rates, though, so I suppose we can only hope they know what they’re doing.