Friday’s employment report, indicating that the economy added 173K jobs in August, now raises significant questions about the FOMC’s ability or willingness to rationalize a 25-basis-point lift in the federal funds target range at its upcoming September meeting. This jobs number is far below the recent average over the last 12 months – 247K per month – and may hint of a slowdown after monthly job gains of 260K in May, and 245K in both June and July. To be sure, the drop in the unemployment rate to 5.1% is one sign of further labor market improvement. However, there are still cautionary signs in the jobs figures. For example, there was a net decline in the goods-producing sectors of 24K, with the only positive number being 3K jobs added in construction. Virtually all the new jobs were created by service-providing industries, the bulk of the rest of the gains coming from government.
Those wishing to forestall a rate liftoff will also point to several other indicators of the lack of further improvement in labor market conditions. For example, the drop in the unemployment rate was not evenly distributed across the labor force. The unemployment rate for whites declined to 4.7%, while the rate for teenagers was 16.9%. For blacks the rate was twice that for whites, and the rate for Hispanics was 6.65%. There was no change in the labor force participation rate and essentially no change in the number of workers employed part-time for economic reasons. The number of people marginally attached to the work force was down by some 329K, but there were still 1.8 million workers in that category.
As for the price level component of the FOMC’s dual mandate, the FOMC still seems far away from its 2% target for the Personal Consumption Expenditure Index. The latest PCE figure for July showed a drop of 0.30%, which is down from June’s 0.34%. Core PCE was basically flat at 1.24% on a year-over-year basis. Core PCE has in fact been steadily drifting down through all of 2015.
When we consider the most recent employment report together with the lack of progress on achieving the FOMC’s inflation target and the current unrest in financial markets, justification for a rate move would either have to rest on whatever positive revisions FOMC members make in their forecasts and/or the anecdotal information contained in the Beige Book. However, Federal Reserve Bank of Boston President Rosengren suggested only a couple of days ago that slowdown in the global economy might suggest a downward revision to US real GDP forecasts and he also cast doubts about the path for inflation. Of course, we won’t be privy to the forecasts until after the meeting, but information in the Beige Book merely suggests that the economy is expanding about on pace with the experience of the past two years. So, unless some unexpected good news comes out between now and the meeting, the odds have certainly fallen that the FOMC will move in September. Note that this is our view on what the FOMC may do. We have been on record for some time now that both markets and the economy would be better off if the FOMC did move.