In August the US economy added just 142,000 jobs, the lowest boost to nonfarm payrolls since January. August’s weak results snapped a 6 month winning streak. Previously the economy had added at least 200,000 jobs in every month since February.
On the bright side, economists and investors believe that last month’s stumble was a fluke. Analysts on Estimize are forecasting that the September jobs report, due Friday, will reflect a return to the 200,000+ jobs per month economy.
Contributing analysts on Estimize are predicting that throughout September the US will have added approximately 232,000 jobs. If the Estimize community is correct, this would be the best month-over-month improvement since January when the jobs report was coming off its lowest tally over the past two years.
In addition to a strong jobs report, analysts on Estimize are expecting the unemployment rate to dip 10 basis points, to roughly 6%. Unemployment hasn’t been below 6% since July 2008.
All eyes will be on the jobs report Friday morning for two reasons.
1. Did the August Report Indicate the Beginning of a Softening U.S. Economy?
First, investors want to make sure that last month’s results were an anomaly, and may be looking for the August figure to be revised upward. Historically, August is the most positively revised month of the year. Investors are expecting to get a slightly better take on Friday. Even if revisions aren’t made, investors will want to see if the September report points to a second consecutive month of weakening in U.S. jobs data, and what that could mean for the overall economy.
2. How will Friday’s Report Impact the Fed’s Timeline for Rate Tightening?
The September report will either confirm or deny the credence of the dismal August report. Whether or not the August jobs report was as poor as initially reported, investors seemed to react positively to it. Futures jumped higher immediately after the announcement, likely due to the fact that a low number would stave off sooner Fed tightening. Janet Yellen has made it quite clear that the normalizaition of interest rates will be closely tied to the employment situation.
Investors will be watching the jobs report closely on Friday to determine if it’s good enough to accelerate the Fed’s current timeline. If the employment situation improves, the Fed could start raising rates as early as March or April. In her remarks on September 17, Yellen left the “considerable time” language in her address, indicating that it would still be a while before the Fed tightens rates. Yet that statement is highly conditional, and she cautioned that the Fed’s commitment to keep interest rates low could change if U.S. economic performance continues to exceed expectations. In any case, the broad consensus is that the normalizing of rates will begin in the summer of 2015.
It’s widely believed that as interest rates begin to rise less borrowing will occur, but the hope is that the economy will be strong enough to absorb the changes. Historically, equity markets experience a minor initial correction when rates are tightened after an extended period of low rates, but this all depends on how much normalizing occurs and how quickly it’s implemented. If things go smoothly, there may be no effect on markets, although on average, after an initial downturn markets tend to rise in the months following a rate increase.
Corporations, depending on which sector they are in, could certainly benefit from a normalizing of rates. The big banks especially, which have had their fair share of challenges over the past several quarters, would welcome a rate increase, as interest revenues have been depressed for sometime now.