“Well, here's another nice mess you've gotten me into!” – Oliver Hardy For a couple of weeks, it was looking like the Fed’s plan to reduce the stimulus it was pumping into the economy (QE3 or the $85 billion of monthly bond purchases) was a done deal. The recent data looked good: second quarter growth was revised higher to a 2.5 percent annualized rate; the monthly average of weekly jobless claims fell to the lowest level since the recession began at the end of 2007; the Institute for Supply Management's manufacturing and service sector indexes improved during the summer; and car sales were strong.
Then the Labor Department released the August jobs report. At first glance it didn’t seem so bad: 169,000 non-farm jobs added, just a bit shy of the 180,000 expected; and the unemployment rate ticked down to 7.3 percent from 7.4 percent, a level last seen at the end of 2008.
But peeling back the onion, things didn’t look too good. The previous two months were revised lower by 74,000, bringing the 2013 average monthly job creation down to 180,000 jobs a month, only slightly ahead of the 175,000 monthly pace seen over the past two years. And then there’s the rate, which dropped for the worst of all reasons: more than 300,000 people left the labor force.
The participation rate, which is the percentage of working age population that is active (employed or seeking employment) in the labor force, fell to a 35-year low of 63.2 percent. To put that number in perspective, the participation rate was 66 – 67 percent over the last 20 years, although some part of the recent decline is due to demographics (i.e. baby boomers retiring). According to Bill McBride of Calculated Risk, “if the participation rate had held steady, the unemployment rate would have increased to 7.5 percent instead of declining to 7.3 percent.”
After parsing the jobs report, the Fed’s decision to taper may not look like a lay up. At the June FOMC press conference, Bernanke said that the Fed would “moderate the monthly pace of purchases later this year” if the data were to be consistent with the Fed’s prediction of slow economic progress. With the August report and revisions to the past two months, there is a case to be made that the improvement is too slow to warrant any change to current policy. After all, the six-month average of job creation is 160,000, which is not much higher than where it stood a year ago, when the Fed believed it was necessary to launch QE3.
But the aforementioned other data points, along with the fact that total non-farm employment has increased by 2.2 million from a year ago and the rate has dropped from 8.1 percent in August 2012 to 7.3 percent currently, might be enough to convince Fed officials that the time has come to at least begin the process of unwinding their aggressive monetary policy. Even after the tepid jobs report, most analysts believe the central bank will announce that it will reduce monthly bond purchases by $10 to $15 billion at the September meeting.
MARKETS: The Dow snapped a four-week losing streak, but it certainly didn’t feel that good. Still, U.S. stocks remain solidly higher on the year...if only we could stop trading now!
- DJIA: 14,922 up 0.7% on week, up 13.9% on year
- S&P 500: 1655, up 1.4% on week, up 16% on year
- NASDAQ: 3660, up 1.9% on week, up 21.2% on year
- 10-Year Treasury yield: 2.94% (from 2.75% a week ago, broke above 3% on Friday; first time since July 2011)
- Oct Crude Oil: $110.53, up 2.7% on week (a 28-month high)
- Dec Gold: $1386.50, down 0.7% on week
- AAA Nat'l average price for gallon of regular Gas: $3.58
THE WEEK AHEAD: Congress is back in session this week and while the focus is likely to be Syria, expect to start hearing about the debt ceiling. The government is on course to reach its $16.7 trillion borrowing limit in mid-October. On the economic calendar, the highlight will be retail sales, which are expected to show a month over month increase of 0.5 percent. If so, the report would provide further confirmation that the economy is gaining steam headed into the final four months of the year.
3:00 Consumer Credit
7:30 NFIB small-business optimism index
1:00 Apple unveils the iPhone5S
10:00 Wholesale Trade
8:30 Weekly Jobless Claims
8:30 Import/Export Prices
2:00 Federal Budget
8:30 Retail Sales
8:30 Producer Price Index