It was going take a lot of bad news to convince the Fed to rethink cutting back on its bond purchases.
The much-awaited August employment report was released today. And while it was not a stellar report by any stretch, there should be enough job growth and strides in unemployment to warrant Fed tapering sooner rather than later.
Non-farm payrolls came in slightly under expectations at 169,000 while the unemployment rate fell to 7.3%. The report underscores two key points: The labor-market recovery continues to be flawed, but it's still showing signs of progress.
First the flaws:
We’re still in the midst of the weakest job recovery since World War II.
Joblessness peaked at 9.9% in December 2009. Four years into the recovery, the current unemployment rate of 7.3% compares to peaks of 6.2% during the “tech bubble” recession (July 2003) and 7.7% during the early-90s recession (July 1992.)
Non-farm payrolls growth has been disappointing in recent months.
Total non-farm payroll employment increased by 169,000 in August, which is below the average monthly gain of 184,000 for the past year. In addition, non-farm payroll growth for June was revised down to 172,000 from 188,000 while nonfarm payroll growth for July was revised down quite dramatically to 104,000 from 162,000. (When the economy is growing at a healthy pace we typically see 200,000 jobs created.)
Many workers are not participating in the recovery:
There’s still a lot of slack in the economy.
- The percentage of total unemployed who have been jobless for 27 weeks or more—what we call “the persistently unemployed"—actually increased to 37.9% in August
- The average number of weeks unemployed remains exceptionally high at 37 (this is up from 35.6 in June)
- The unemployment rate for those without a high school diploma stands at 11.3%, well above the 6.2% level seen in August 2007
The unemployment rate will likely remain higher than normal if job growth entices people who have given up on finding work to reenter the work force.
But this is still a recovery:
The growth streak continues.
- U6 (broad) unemployment is at 13.7%
- Only 63.2% of Americans now participate in the labor force—meaning they have a job or are looking for one—which is the lowest rate since August 1978
The August jobs report caps 35 consecutive months of nonfarm payroll growth.
Initial jobless claims have fallen significantly in August.
We are currently at a five-and-a-half-year low. While job growth is not robust, we’ve seen a significant reduction in layoffs which is helpful to the overall employment situation.
The taper timeline is intact.
The report was closely watched because of its implications for the Fed’s decision on when to begin QE tapering. As I wrote in the The Upshot earlier this week, unless it’s a terrible report, we think it will give the Fed the green light to begin tapering its bond purchases later this month. Given that this report was disappointing but not awful, we think the Fed will move ahead with tapering in September.
Now the question becomes, “What will the tapering look like?” Given all the looming uncertainties—including a debt/budget showdown in Washington and a slow-moving economy—don’t be surprised if the Fed starts small with a “tiny taper” of $5 billion to $10 billion. Also, watch for tapering that's focused on government bonds and not mortgage-backed securities, given concerns about derailing the housing recovery.