In its recent policy meeting statement, Federal Reserve officials said that in the six weeks since the previous meeting, “The labor market continued to improve, with solid job gains and declining unemployment.” The central bankers also noted that a range of indicators point to diminished slack in the jobs market since early this year. With just a little more progress in the labor market, the Fed could finally pull the trigger on its first interest rate increase in more than nine years. Whether that decision occurs at the September, October or December meeting has caused great consternation for analysts, economists and navel gazers. For the rest of us poor schlubs, the exact timing doesn’t matter all that much. The bottom line is that that short-term rates will likely rise before the end of the year.
The rationale for sooner, rather than later on rate increases is clear: start now, while data are improving in order to be ahead of the curve. The “what’s the rush?” argument is: sure job gains are strong, but wage growth still stinks – fresh evidence of which was seen on Friday, when the Fed’s favorite measure, the Employment Cost Index, showed the slowest pace of quarterly growth since at least 1982 in the second quarter. In fact, total compensation grew by just 2 percent from a year ago, down from 2.6 percent in Q1. Without robust wage growth, consumers are unlikely to spend, which will keep annual growth mired at this lousy two percent rate.
The data this week may help clarify things for the Fed. There are only two monthly jobs reports before the next FOMC meeting in September and one of them occurs this Friday. Predictions for monthly jobs created are running between 200,000-250,000. In the first six months of the year, monthly job creation has averaged 208,000, less than the nearly 260,000 monthly average seen in 2014.
The unemployment rate should remain at a seven-year low of 5.3 percent, but that number comes with an asterisk. While more people have nabbed jobs during the recovery, there has also been a big drop in the labor force participation rate, which measures the percentage of people working or actively seeking employment. The rate was at 62.6 percent as of June, the lowest level since 1977.
The participation rate peaked in 2000, when according to Capital Economics, “there were only 18 people in their 60’s for every 100 prime-aged people (those aged 25-54). Today there are 28.” In other words, a lot (probably half) of the falling participation rate has to do with aging Baby Boomers, who are retiring. Sure there are people who are fed up and checking out of the workforce or maybe earning money in some sharing/gig economy type of arrangement, but economists say those numbers are probably not big enough to call it a trend.
MARKETS: Chinese stocks are still in a bear market (down 29 percent from the June peak), but US and European markets edged up on the week.
- DJIA: 17,689 up 0.7% on week, down 0.8% YTD
- S&P 500: 2,103, up 1.2% on week, up 2.2% YTD
- NASDAQ: 5,128 up 0.8% on week, up 8.3% YTD
- Russell 2000: 1238, up 1% on week, up 2.3% YTD
- 10-Year Treasury yield: 2.2% (from 2.27% a week ago)
- September Crude: $47.12, down 2.1% on week
- October Gold: $1,094.90, up 0.9% on week
- AAA Nat'l avg. for gallon of reg. gas: $2.66 (from $2.72 wk ago, $3.52 a year ago)
THE WEEK AHEAD:
Motor Vehicle Sales
8:30 Personal Income and Spending
9:45 PMI Manufacturing
10:00 ISM Manufacturing Index
10:00 Construction Spending
Coach, Walt Disney
10:00 Factory Orders
FitBit, GoDaddy, Herbalife, Tesla
8:15 ADP Private Jobs
8:30 International Trade
10:00 ISM Non-Manufacturing Index
8:30 July Employment Report
3:00 Consumer Credit