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The August Employment Report and the Fed

Contributed by Raymond James

The August job market report was disappointing. Nonfarm payrolls rose less than expected and previous figures were revised lower. The unemployment rate fell, but that was due to a decrease in labor force participation (don’t read too much into that). Federal Reserve officials were close to taking action at the previous policy meeting and many judged that additional accommodation “would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” In his Jackson Hole speech, Chairman Bernanke said he that “the stagnation of the labor market in particular is a grave concern.” The jobs report should push the Fed off the fence.

The jobs report wasn’t horrible. Job growth is still positive. However, the pace has remained relatively lackluster. Private-sector payrolls continue to improve, up 4.627 million since bottoming in February 2010. That sounds impressive, but that comes out to an average of 154,000 per month, somewhat more than would be consistent with the growth in the working-age population (about 140,000 per month).

Meanwhile, state and local government payrolls fell another 10,000 in August, down 690,000 since January 2009 (around 16,000 per month). Federal government employment is up a whopping 19,000 since January 2009 and has been trending lower over the last several months. If the decrease in government jobs had not occurred, the unemployment rate would be about half a percent lower than it is now (and if state and local government were growing in line with the overall population, unemployment would be a full percent lower).

The Employment Report is made up of two surveys: the establishment survey and the household survey. The household survey is based on a sample of 60,000. You don’t get good measures of levels (such as the size of the workforce or the number employed), but estimates of ratios (the unemployment rate, labor force participation, employment/population) are reasonable (still only accurate to ±0.2%). The August survey showed large drops in the labor force (-369,000), the employed (-119,000), and the unemployed (-250,000), along with a huge increase in the number of people not in the labor force (+581,000). These monthly changes are essentially meaningless.

The unemployment rate has trended lower over the last two years. However, the employment/population ratio has trended about flat. That’s consistent with the pace of growth in nonfarm payrolls over the same period. Bottom line, we’re growing fast enough to keep pace with the growth in the population, but not enough to make up much of the ground lost in the job market during the downturn.

The economy continues to face headwinds, including high gasoline prices, depressed housing wealth, contractionary fiscal policy, and weakness abroad. Moreover, fiscal policy may get a lot tighter in 2013. The Fed can counter that. Extending the forward guidance should be an easy decision. Further asset purchases would have pluses and minuses, but the pluses should be greater, leading the Fed to act this week.