The U.S. economy added just 169,000 jobs in August, fewer than forecast and a number that will surely complicate the Fed’s decision over when and how to start scaling back its easy-money policies.
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The headline unemployment rate fell to 7.3%, according to numbers released Friday by the U.S. Department of Labor, down slightly from July’s rate of 7.4%. But the lower August rate was once again caused by significant numbers of Americans leaving the workforce.
The labor force participation rate fell again last month, dipping to 63.2%, the lowest rate since the mid-1970s.
Economists had forecast an increase of 180,000 jobs and that the rate would hold steady at 7.4%.
Todd M. Schoenberger, managing partner at LandColt Capital LP in New York, described Friday’s data as “demoralizing and sad to the unemployed.”
“The uncertainty factor has been ratcheted up a notch as Wall Street received little closure with the ongoing 'Fed taper' argument. (Federal Reserve) Chairman (Ben) Bernanke and Co. may have missed their window to taper in the second quarter when the country had better GDP rates and jobs data to work from. Markets will not like this number,” Schoenberger said.
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Stock markets initially rose in early trading, rising more than 50 points. But the rally ended quickly and the Dow Jones Industrial average was recently trading down 25.50 at 14,911.
Adding to the disappointing headline numbers, the Labor Department said fewer jobs were created in June and July than initially reported. Revising those earlier numbers downward suggests that labor markets slowed considerably during the summer. Employers have added an average of 148,000 jobs in the past three months, well below the 12-month average of 184,000, according to the Labor Department.
The key construction sector, critical to the U.S. housing recovery, added no new jobs.
Anticipation had been high for the government’s August jobs data because it’s widely believed the Fed is poised to start winding down its $85 billion a month bond purchasing program known as quantitative easing, possibly as soon as this month.
The data released Friday morning isn’t going to make that decision easier. The policy setting Federal Open Markets Committee will announce any Fed policy changes at the conclusion of its next two-day meeting scheduled for Sept. 17 and 18.
Conventional wisdom ahead of the release of Friday’s jobs report held that the Fed’s decision to begin tapering its bond purchases would depend largely on the number of jobs created in August.
If the economy added 200,000 or more, the Fed’s decision to taper would be easy, analysts predicted. Similarly, if the economy added 150,000 jobs or less, the decision to delay tapering would also be easy.
If, however, the number fell in-between those two benchmarks the Fed’s decision would be far more difficult. That’s what happened.
Stock markets have surged as the Fed has initiated unprecedented stimulus measures in the wake of the financial crisis of 2008 and the deep recession that followed. The Fed has kept interest rates at near zero and raised its balance sheet to $3.6 trillion through massive purchases of mortgage-backed securities.
But Fed policy makers have made it clear in recent months that the time to start winding down these stimulus programs is approaching.
Bernanke has said the decision to start tightening monetary policy will depend largely on the health of U.S. labor markets. The unemployment rates has come down from 10% in October 2009 at the height of the financial crisis, but the jobs data released since then has been mixed.
For instance, in many instances when the monthly unemployment rate ticked lower – as it did in August -- it did so not because more Americans found work in the previous month but because significant numbers of people left the workforce altogether. When people leave the workforce the Labor Department no longer counts them as part of the unemployment survey, which causes a reduction in the percentage of people the government describes as unemployed.
What’s more, economic uncertainty related to U.S. fiscal policy and health care reform laws that take effect in 2014 have pushed employers toward hiring more part-time employees, a situation that doesn’t benefit the strength of the broader economy.
In a speech in July defending the Fed’s easy-money policies, Bernanke said the current unemployment rate “overstates the health of labor markets.”
The Fed has promised not to raise interest rates from their historically low range of 0%-0.25% set four-and-a-half years ago until the unemployment rate falls to at least 6.5%, a figure Bernanke has emphasized is a “threshold” rather than a hard target.
The Fed has gone out of its way recently to explain to investors that interest rates won’t be raised until well after quantitative easing is phased out, and neither will happen until labor markets improve significantly.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said Friday’s jobs report will likely be one of several economic indicators used by the Fed in its decision on whether or not to begin tapering.
“It is probably a bit of an exaggeration to link too tightly one high frequency report to the Fed's tapering decision. Its general assessment of the economy is unlikely to have been altered by this volatile report,” Chandler said in a note to clients.