Do Pint-Sized Payrolls Mean a Tepid Taper?

169,000 new jobs in August. Sounds pretty good…unless you were expecting 180,000. Combine that with June and July gains getting revised down by 16,000 and 58,000, respectively…and you get something that falls somewhere between ‘super tepid’ and ‘lackluster.’ So, when the Federal Reserve meets next week, what will they think about jobs numbers and how will that affect their tendency toward tapering?

Year-to-date average monthly payroll gains sit at 180,250. That’s lower than the average in 2012, and more importantly, it’s lower than the rate of 200,000 that some FOMC members would prefer to see before cutting the pace of bond purchases. Of the combined June-July revisions (-74,000), an unusually high amount (over half) came from local government – mostly education.

The unemployment rate fell to 7.3%, which is the lowest we’ve seen since December 2008. However, the tick down in unemployment comes from negative factors. Unemployment figures only count as unemployed those who are out of work, but actively looking for work. The unemployment rate ticked down in August because the number of out-of-work people who quit looking for work went up. This signal points to a steady expansion of people not in the labor force that is sheltering a growing number of discouraged workers and artificially lowering the reported unemployment rate.

So how will the Fed look at this? First, they could overlook the downward revisions from June and July. Seasonally adjusting the number of education jobs is difficult – it’s summer, so there are always very large losses for teachers at that time of year. The good news is that these large downward revisions probably won’t be repeated in September.

Next – and here’s the important part – the Fed has to interpret a decline in the unemployment rate that depends on a falling labor force participation rate (LFPR), which currently sits at 63.2%. Over the last year, the Fed has seen the LFPR dip to a 35-year low, signaling that there are 90 million working-age people who aren’t part of the labor force. Are these 90 million potential workers just sitting on the sidelines, waiting for better economic conditions? When you parse it out, that doesn’t appear to be the case. Of that 90 million, only about 2.3 million meet the qualifications of 1)wanting to work, 2)available for work, and 3)actively looking for work. Of that 2.3 million, around 866,000 could be listed as “discouraged,” meaning that they’d quit looking for work because they believe there’s no work available. The balance of the 2.3 million falls into this category because of retirement, school attendance, or family responsibilities – folks that are unlikely to re-enter the workforce in the near future. Even if all 2.3 million did get an itch that only a paycheck could scratch and they all re-entered the labor force at the same time, the LFPR would only rise to 64% and boost the unemployment rate to 8.3% from its current level of 7.3% – not a huge move. All in all, a shrinking LFPR shouldn’t stop the Fed from beginning to taper its quantitative easing program.

Maybe not a big reduction at the next Fed meeting…but something to show they’re serious. You can read more about the jobs numbers in our economic insights. There’s also detail on the improving story of global growth and on Shanghai’s new status as a Chinese “free-trade zone.”


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