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.
This is the new norm. Of course what no one wants to recognize is the conditions after WWII that created the middle class are not going to return. There are few manufacturing processes that can’t be automated. It was those manufacturing jobs that were responsible for the middle class. Then there are diminishing resources. We have already drilled for the cheap and easy oil and gas. And fracking is not an answer – none of the companies who are involved in fracking have ever made a penny on the product they take from the ground. The same can be said for the Alberta tar sands – oil is now going for about half of what the operators need to show a profit. We have also mined all the easy iron, copper etc. The phosphates needed for our agriculture are becoming scarce. And then there is water.
The Fed is probably sick and tired of being whined at by all the old geezers. Old geezers who dumped their money into bonds the way they’re supposed to and are only making 1-2% on them
(There’s a sizable number of retired people who write similar complaints to the WSJ. They seem to think that for some reason it’s the government’s job to provide tax-free bonds with a 5% return, because that’s what they did their retirement calculations on. Idiots.).
I think of there are lot of inflation hawks on the Federal Reserve board left over from when combatting inflation was what Federal Reserve Bankers lived for. Fortunately, the head of the Board is Janet Yellin, and she is as to central bankers as Krugman is to economic pundits-almost always right. Expect her to strongly resist any premature raising of rates.
Her latest speech:
I will say, though, that the current market environment is particularly hard on people looking for steady income return. All of the old advice about asset mix is useless — 7 year CDs are paying less than likely inflation and bonds are crap. Some of the shorter-term TIPS were actually selling at negative yields last I checked, as people use them purely as hedges. Stock dividends are out of fashion, as well.
I heard on NPR’s Marketplace this morning that the Fed may feel compelled to raise rates in September, as they have hinted at it for so long, and if they don’t people will ask what the Fed knows about the economy which they don’t and may start a panic by not raising rates. Not sure I buy it, but…
Increasing the strength of the $US against world currencies seems to me to be such a bad idea for the economy that, considered alone, would recommend strongly against raising the Treasury rates.
I would point out entirely parenthetically that the contest between “hard money” and “easy money” is a debate that has gone on for literally the entire lifetime of the US and it’s almost never about the economy. It has always been about which segment of the economic/political/regional divisions that make us a single country has dominance over the others.
Or it could be a shift in people’s priorities. I’m not sure why we should assume that everyone who has worked, or could work, wants to work again now. I have no doubt some do, but it’s a good idea I think to keep one’s mind open to the possibility that humans do not remain as stolidly unchangeable as economists would like.
You remember the story about the scorpion begging a ride across a river on the back of a frog. Half way over it stings the frog and they both drown. Why? because it’s a scorpion. The Fed raises rates.
@grumpy realist: A bit of trivia. Picketty talks about Jane Austen novels. Says that in them it is simply assumed that if you know a man’s income, you know his capital, and vice versa. The rate of return was 5%. Always had been and always would be.
@michael reynolds: Because, all things considered, things like healthcare and education are more expensive than they used to be?
But other things are relatively less expensive. Entertainment is close to being free if you put in a little effort. And it’s a lot cheaper to hop an Uber half a dozen times a month than it is to buy and maintain a car if you live in an urban area. Cars are less necessary in a world where Amazon will send you anything you want within 48 hours. Travel is less compelling in a world of terror threats and Google Street View and less necessary for the businessperson as well.
Then, too, we’ve recently had a shocking lesson in the fact that real estate does not always go up, that it is not a quick trip to financial stability.
Cultures do change, priorities do shift.
No offense Michael ,but the very fact you mention Uber here is a reminder of your myopia as an upper-upper-upper middle class man. True, a lot of the people who use Uber might not own cars, and might work from home, or not as many hours at they possibly could, but they all work- and make good money. For the vast majority of people who don’t use Uber (say, the majority of UBer drivers who use it to supplement income from their first job), even that is not really an option.
The trouble is that the economy is about as complex as the weather. Basically the Fed is guessing….perhaps and educated guess…but a guess nonetheless.
Inflation is inching up. We want some inflation, but not too much, so the Fed thinks raising interest rates will manage the increase in inflation. Maybe. But with employment still kinda weak it’s questionable.
I’d prefer we don’t try to micromanage stuff we don’t really and truly understand.
But if we are going to I trust Yellen a lot more than guys like Art Laffer and Stephen Moore and the rest of the failed Republican economic staff.
First, I was born poor and remained poor for about 35 years, which would give me more experience of poverty than most of the people here.
Second, you’re wrong as regards Uber. In fact poor people are big users of taxis which tend to be a bit pricier. I know because in the bad old days I was often forced to spend my meager resources on cabs to the grocery store. The only thing differentiating an Uber user and a taxi user is a smart phone – which a lot of working class folks have.
Also, you’re assuming everyone of this imagined population segment that is not interested in work is necessarily poor. Some may have spouses covering their bills. Some may have discovered they’re just as happy pulling 25 part-time hours as they were doing 40+ hours. We work to buy, for the most part, and if you de-prioritize possessions you may reap the benefit in shorter work weeks.
I don’t know obviously if any of this is a partial explanation. But economists don’t know that it isn’t, and it is certainly within the realm of possibility. We don’t actually need McMansions and BMWs. We may like them but not feel like wasting our lives working to get them. The open-ended and insatiable acquisitiveness of Americans is learned behavior, and can be unlearned.
@C. Clavin: A little inflation right now would be a good thing. The Fed has an inflation target of 2%, which they’re not hitting. As Dr. K keeps saying, maybe they should hold off until there’s actual evidence of pressure on wages before they act like there is.
@C. Clavin: I think it’s a bit of a case of “the natives are restless; let’s do something to calm them down.” Fed rates have been where they are for…how long?
Long enough that I was able to refinance my mortgage TWICE on the strength of that, getting a cheaper and shorter mortgage each time. Am almost a third through my present 10 year mortgage and have clobbered the silly thing from $150K to $80K. At some point it gets low enough that there’s no sense in refinancing.
Have discovered throwing an extra $100 towards the capital each month ain’t a bad strategy. Gets me about the same result as the “pay half your monthly amount each two weeks” acceleration technique.
@michael reynolds: My own desire for large estates got zapped in the bud when I had to take care of the family house after my mother died. Now whenever I look at one of those overgrown McMansion monstrosities, my first thought always is: “but who will take care of the dusting?”
If I were to create my own perfect house, the only thing I’d change from the floorplan of my present apartment would be a vegetable garden and a separate library. The books always manage to take over….
I may be wrong, but I thought that the number needed to keep up with population growth was ~90,000.
This story says ~80,000.
See, this is exactly why I’m suspecting this may not be so small a phenomenon. Like you, I don’t want a big house. I could afford a big house, but why in hell would I want it? I could afford another car or two, but why? What would that accomplish? I could buy $100 bottles of wine and $30 cigars but I’m equally happy with $20 bottles and $13 cigars.
The fact is people bought a lot of what they bought because the guy across the street did. That’s social pressure and that pressure is diminishing. Validation comes in other forms now, a guy with 5000 Twitter followers can feel superior to a guy with a McMansion. And a guy with a 90k BMW may in many circumstances have a lower status than a guy with a 25k Nissan Leaf.
Connected to this is the aging of the population – a 60 year-old with grown kids isn’t in stores as often as a 40 year-old with children.
People who want less stuff may not want to work as much. They may prioritize happiness. In fact, I think that’s happening. I would like to see some serious polling that digs into the attitudes of workers and people now not working. Do economists take the temperature of actual humans, or do they simply assume we are numbers.
I’ve found the following is the best way to respond to God bothers.
I kindly look them in the eye and with a soft voice wish that they get an opportunity to meet the God of their dreams on judgement day.
Knowing we’re all human and fallible, the God of my dreams is a forgiving God, she’ll ask me did I try to do right, I’ll say yes and she’ll forgive me for my failings and welcome me into her arms. Those that worship the flying spaghetti monster, will be asked did they follow the tenets of her religion and mock all those who came before them, if they can answer yes, she’ll welcome the into her al dente arms. Plug in your belief, and, so on, and so on, and so on. Atheist will be ignored, God, doesn’t believe in them.
However, those who follow a stern and unforgiving god, whoo hooo, I am looking forward to standing on the sidelines and watch them meet their god. As I said earlier, we’re all human and fallible, so we know the God bothers will have sinned in some way.
People have gone back to work in such lucrative fields like sidewalk scrapers, school crossing guards, door to door vacuum cleaner sales, and theme park cotton candy technicians !
@Tyrell: Perhaps the emphasis on support for the ‘job creators’ is misplaced?
How about black and white TV technicians at Nicleodean?
@C. Clavin: uh, maybe Radio Shack technical support
Let me float this by you: What if all those jobs you just mentioned paid at least $31,200? Would you still be dismissive of them? All those jobs sound necessary to me. Some might even be interesting. I’ve often thought of retiring to a food truck, that’s not so different from selling cotton candy at a theme park.
You sneer at those jobs because they’re low-paying. But if they were making $15 an hour, a bit more in expensive urban areas, we could acknowledge their legitimate contribution. Right? We need sidewalk scrapers, right?
The profound problem is that we do not, as a civilization, know how to manage a low-growth economy. Much of the drive for the real estate boom was investors world-wide looking for something, anything, that will pay more that 1-2 percent. This is the source of the “giant pool of money” available for mortgage backed securities that allegedly were secured debt paying a bit more than 5%. Similarly Bernie Madoff’s scam, that paid so little (6-8%) that people could not believe it could possibly be a ponzi scheme.
Now we have much of the EU infrastructure being packaged and sold to Asian investors for negative interest rates, because a loss of 2% per year denominated in Euros sounds like a great investment when you are sitting on billions of Yuan and need something, anything, to pay pensions in 20-30 years with Yuan.
Where does this leave a typical American person saving for retirement? Holding cash until random speculative opportunities open up in gold, land, and forex?
@Ron Beasley: Your observation is full of just-so stories.
Whether it is an answer or not, the broad statement “none of the companies…” is utter nonsense and false.
Nonsense and again utterly false. There are massive stores of easy-to-access iron in Guinea, just to cite one easy example. Nor is it per se the case that cheap-to-extract (a more accurate term than ‘easy’) are used up even in developed countries.
False. Completely false. There are several centuries worth of proven phosphate reserves. Never mind what could be identified with proper economic motivation.
Now this one is a true point for large swaths of the planet – plenty of places with Mediterranean type rainfall patterns are bumping up against or well beyond their water budgets under current models of consumption – essentially due to agriculture and inefficient usage.
Fresh water and salinization problems of soil, now that is a real genuine problem. Not ‘running out of resources’
Water is going to be a major driver of actions in the future. Technology will blunt the impact some but in some areas it’s going to be pretty awful.
@Matt: One of the reasons I’m very happy living right next to the largest pool of unsalted water in the world…
We could do a heck of a lot more with the water we DO get if we used it better. Drip-irrigation should be mandated for all agriculture in California, as well as tariffs to discourage water-intensive crops. Why we grow almonds and rice in California right now is beyond me. And then we ship the almonds to China, which is essentially exporting a heck of a lot of desalinated water OUT of the country.
More of our policy makers should read Heinlein’s “The Moon Is A Harsh Mistress” if only for the major reason behind the revolution in the first place.
And we should dump as much money as possible in the following areas of technology: carbon sequestration, nanotechnology, better desalination technology, stronger materials, solar cells….
And better protection for bees against bee colony collapse. It hardly does one any good to be rich if you can’t find any FOOD!
I’m doing my bit, but it’s going to take a while before my own tinkerings(hopefully) are fruitful.
I’m doing my part by boycotting Almonds. I heard a statistic – one gallon of fresh water is consumed per almond.
It gets worse:
@michael reynolds: They may prioritize happiness.
Yeah, I would pretty much bet everything I own that “happiness” is a minuscule factor at best. I don’t doubt that half a generation of Great Recession and sluggish growth has spawned a certain anti-materialism but I don’t think those Uber drivers are doing it for fun.
@michael reynolds: Very good point. But at $15 /hour to make cotton candy, who needs a degree ? I ran a cotton candy machine a couple of times. You have to turn those cones just right to fill them. And touch touch the spinner in the middle, it will cut. Still fun, just don’t sample too much.
@grumpy realist: All systems that will increase the principle paid by some fixed increment every month work about the same way. The trick Is finding one that you can do every month, not which one you pick.
@Just ‘nutha ig’rant cracker: Also depends on how your bank allows you to set up the payments. It was trivial for me to add another $100 to the principal each month when I was setting up the automatic payments; not so easy to do the “1/2 of the payment every two weeks…”