Relax, Chicken Little, the sky isn’t falling.
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A lousy September jobs report doesn’t necessarily mean U.S. economic growth has stalled and that the Federal Reserve should postpone raising interest rates indefinitely.
Look beyond the dismal September headline numbers – just 142,000 new jobs, well below expectations, a drop off in labor force participation rate, and wages that fell slightly – and the long-term trend still points toward a strengthening labor force.
“This report, while disappointing versus consensus expectations, is just a continuation of the good not great slow labor recovery we have been living with for the last 5 years. We see this trend continuing over the next 12 months,” said Scot Wren, senior global equity strategist at Wells Fargo Investment Institute.
Wren said a deeper dive into the labor report released Friday shows that some important trends essentially stayed on track, neither gaining nor losing significant momentum despite the weak job growth. Year-over-year wage growth, for example, was 2.2%, a bit lower than the 2.4% predicted and weaker than hopeful optimists had projected but “not a surprise,” Wren said.
Wren also said the four-week moving average of jobless claims should remain “well below” 300,000, a “good number” that “tells us things will continue to improve slowly in the labor market.”
The immediate response following the release of the Labor Department report on Friday was one of deep disappointment. The Dow Jones Industrial plunged more than 200 points shortly after opening and television pundits were saying a rate hike later this year is now off the table, despite recent claims otherwise by prominent Fed policy makers including Chair Janet Yellen and New York Fed President William Dudley.
The Dow has moved higher toward midday, shedding its earlier losses by half, and cooler heads are prevailing. A December rate hike is still on the table.
“We still believe the Fed will hike rates at the December meeting and will hike rates probably only 2 more times in 2016,” said Wren.
The Fed voted last month to delay raising rates for the first time in nearly a decade after months of speculation and hints by Fed members that liftoff would begin in September. Ironically, members of the policy setting Federal Open Markets Committee had cited strong job growth as justification for raising rates. Oversees turbulence and the uncertainty it spread throughout global markets was cited by central bankers as the primary reason for the delay.
Obviously, the September report potentially shifts that view on the labor market and perhaps vindicates the Fed’s decision to delay in September. And it probably removes any chance of liftoff at the Fed’s meeting later this month.
“As FOMC participants pick up this employment report, they will likely cross-out October from the 2015 list of potential rate-hike months,” analysts at Oxford Economics wrote in a research note. “Nonetheless, December remains a firm possibility as the employment trend remains solid, (and) unemployment indicators remain near cyclical lows.”
Kirk Barneby, Centre Active U.S. Treasury Fund portfolio manager, said there may even be a silver lining to the weak report in that it gives the Fed a little breathing room to study and determine how other factors are affecting the U.S. economy before they make a decision on a rate hike.
Had the September jobs report been strong there would have been a lot of pressure to raise rates at the October meeting, said Barneby. Given numbers that didn’t meet expectations, central bankers now have “greater flexibility” in looking at other issues, such as the slow pace of inflation or wage growth, which has been just 2.2% year-over-year, the turbulence overseas and the strong dollar.
There is less pressure now to act, he added, and probably greater justification not to act looking at these other factors given the report was below expectations.