The good news in Friday’s BLS jobs report is that the unemployment rate remained at 5.1% in September. All the rest of the report has to be disappointing, especially to Fed officials. Up until Friday’s report, they were promoting the idea that the FOMC’s October meeting was “live” with regard to the possibility of the first upward move in interest rates in seven years towards a more normal stance of policy. That now seems to be dead in the water, and the odds of a move at the December meeting have faded significantly as well.
How bad was the report? Nearly all the indicators that Chair Yellen and other FOMC participants have recently cited as important in assessing labor market conditions showed some degree of deterioration. The headline number from the BLS’s employment survey indicated that the economy created only 142 thousand non-farm payroll jobs in September. This figure is far below the average of 199 thousand per month for 2015 and is down from an average of 250 thousand per month in 2014. To make matters more difficult for the FOMC, July’s figure was reduced some 22 thousand, and August’s number was revised down from 173 thousand to 136 thousand. With these adjustments the last three months’ increases now all fall below the reduced average for the year. Had those downward revisions been available to the FOMC at its September meeting, we may be sure that the upbeat note struck by some FOMC participants post-meeting would have been different. But there is more.
The labor force participation rate, which has been on a steady downward trend, continued to slide and it now stands at 62.4%, down from 62.6% in August. We have argued in other commentaries that it is not clear what that rate should be in equilibrium, but that open question has not stopped policy makers from looking for resurgence in the participation rate as evidence of an improvement in labor market conditions. Equally troubling, the employment-to-population rate declined to 59.2% after showing some increase through August. While there was some improvement in the number of people marginally attached to the work force, the number of “discouraged” workers – those who have given up looking for work because they don’t believe jobs are potentially available to them – was flat.
Based on this report, it now seems likely that the more dovish members of the FOMC, who are the dominant majority of participants, will conclude that the time for a policy move is yet a ways off. The revised employment data will cause them to downgrade their recent assessments of improvements in labor market conditions. Chair Yellen’s press conference and her more recent speech at the University of Massachusetts should leave no doubt about the extreme weight she gives to the labor market and Phillips Curve in shaping her policy views.
Markets are now likely to downgrade any likelihood of a policy move in 2015, notwithstanding the dot chart and recent comments by FOMC participants. In fact, while some market commentators are now suggesting that a fourth round of quantitative easing may be called for, former Dallas Fed president, Richard Fisher, has stated that the FOMC is essentially out of ammunition.