August US Jobs Report Is Disappointing: 6 Takeaways

ANALYSIS

 @moranzhang on September 07 2012 11:22 AM
Job seekers stand in line to speak with an employer at a job fair in San Francisco
Job seekers stand in line to speak with an employer at a job fair in San Francisco, Nov. 9, 2011. REUTERS

It's been three years since the Great Recession technically ended, and still, unemployed Americans are struggling to find work.

On Friday, the Labor Department reported that the economy added a worse-than-expected 96,000 jobs in August, while the unemployment rate fell to 8.1 percent on falling labor force participation rate.

Economists polled by Reuters had expected payrolls to rise 125,000 last month, but some had pushed their forecasts higher after upbeat ADP data on Thursday.

This is the fourth time in the past five months that the U.S. economy has added fewer than 100,000 jobs, which is disappointing by any measure. In the past two years, the U.S. economy has been adding jobs at a rate of about 150,000 per month.

Compounding the weak August report, July and June payroll numbers were also revised down. July payrolls rose 141,000 compared with the initially reported 163,000, and June was up 45,000 versus an earlier estimate of 64,000.

The abysmal report stoked fears that America's uneven economic recovery is faltering once again, making July's better-than-expected gain of 163,000 jobs looking like a head-fake.

"Job growth in the second half of 2012 is likely to average around 140,000 per month, close to its average so far this year, as demand continues to slowly improve," said PNC senior economist Gus Faucher. "The unemployment rate will remain above 8 percent through the rest of 2012 as job growth roughly keeps pace with labor force growth."

Here are six takeaways from the August jobs report:

1.      Don't expect to find a silver lining

There's no way to color today's jobs report positively, even when it comes to the drop in unemployment rate. In August, the unemployment rate fell back to 8.1 percent, from 8.3 percent in the prior month.

"The decline in unemployment rate is not good news," said Steve Blitz, chief economist at ITG Investment Research. "It only declined because less people were looking for work. What this is telling you is that people are giving up looking for work."

The participation rate, which indicates the share of working-age people in the labor force, fell to 63.5 percent, the lowest since September 1981, from 63.7 percent. And 30 years is a long time.

To be fair, some part of that decline reflects baby boomers retiring and moving out of the work force. But the scale of the contraction in the labor force - a massive 368,000 - spells trouble.

Stripping out the swings in the labor force, the employment-to-population ratio dropped to a 12-month low of 58.3 percent, from 58.4 percent, suggesting that no progress has been made in reducing labor market slack over the past year.

2.      Forget about the ADP numbers

Maybe it's time to finally call ADP's numbers irrelevant.

Data released Thursday in the ADP National Employment Report showed that the private sector created 201,000 jobs in August, more than the approximately 140,000 various analysts expect and the biggest gain for employment in five months. That's a far cry from what the Bureau of Labor Statistics reported Friday.

"Although the correlation between the ADP and BLS initial estimates is quite high at 0.91, the former's misses make us wary of using it as a forecasting tool," said Societe Generale's Senior Economist Brian M. Jones.

The average absolute miss since the ADP survey's inception using original data has been 74,000 jobs, with a maximum error of 290,000.

3.      Manufacturing is losing its luster.

Manufacturing has been a bright spot in the otherwise anemic economic recovery. Until this summer, the sector expanded for 34 months in a row.

In August, manufacturing jobs posted the biggest loss in two years. Factory jobs decreased by 15,000, compared with a survey forecast for a 10,000 increase, after a 23,000 gain in the previous month.

Blitz pointed us to a lesser-known indicator that's buried deep down in the jobs report -- the diffusion index.

The BLS asks businesses they survey if they plan to cut payroll, grow payroll or maintain the same number of employees. Readings above 50 on the diffusion index suggest that companies are looking to hire new employees.

For total private industries, the index dropped sharply in August to 50.2, compared with 57.3 a year ago. That means only 50 percent of the firms are either hiring or not doing anything.

Meanwhile, the diffusion index for manufacturing plunged from 50 percent to 36.4 percent, which means most firms in the manufacturing sector are shedding workers.

4.      The U.S. economy is unquestionably in the pits and the global economy is not helping

The dismal jobs numbers reflects a slowdown in the global economy, which has been rattled by a volatile debt crisis in Europe and lackluster growth in China, which likely has seen the last days of double-digit growth.

"Friday's data shows continued slow growth in the overall U.S. economy and underneath that, the deceleration and shifting into the negative column in the manufacturing sector, which specifically relates to the slowdown in global growth," Blitz said.

For the past ten years, if not longer, growth was centered on homes -- it was basically leveraging into real estate. People taking money out of real estate to buy stuff, people were leveraging to buy more real estate and that boosted the construction industry, the mortgage industry, the financial industry and everything else.

"That world is not coming back, and it isn't necessarily healthy to try and get that kind of growth back," Blitz said. "The U.S. is in the process of adjusting to a different type of economy."

"The problem is as we adjustment towards more manufacturing and industrial, it requires the rest of the world to grow and the rest of the world is not growing," Blitz said. "Hence, you have increasing contraction in the manufacturing sector."

Gross domestic product is likely to contract in the euro zone in the third quarter, while growth in the U.S. is below trend and China's economy is failing to respond to policy stimulus.

5.      Obama can't be pleased by these numbers

Friday's jobs report came two months before the presidential election.

The good news for President Barack Obama is: The economy has added jobs every month since September 2010. Other than that, the numbers look pretty disappointing. The paltry 96,000 job gains could slow President Barack Obama's momentum after his convention speech Thursday night.

Employment and the economy are central themes in the campaign, with President Obama and Republican challenger Mitt Romney each trying to convince voters they can best jumpstart the economy and create jobs.

"It [Friday's jobs report] makes the story harder, but it's not a deal killer [for Obama]," Blitz said.

6.      QE3 Anyone?

For the Federal Reserve, the August jobs number is be the last major data point for the central bank's policy-setting body to consider ahead of the Sept. 12-13 Federal Open Market Committee, or FOMC, meeting.

After seeing the dismal results, some economists believe this will likely remove any final doubts at the Fed about the need for more monetary stimulus.

Economists at Goldman Sachs now "expect a return to unsterilized and probably open-ended asset purchases" from next week's FOMC meeting. The bank expects monthly purchases of about $50 billion, but notes an asset-purchase program isn't a given, adding that it's "possible Fed officials will limit themselves to a lengthening of the forward guidance" as it puts odds of another round of quantitative easing, or QE3, at above 50 percent.

PNC Senior Economist Gus Faucher said Friday's report means that the FOMC "is almost sure to act when it meets next week." Policy makers will announce next week that it will extend the period over which it expects to keep the Fed funds rate near zero to mid or late 2015. Currently, the central bank has said it will keep the rate near zero through the end of 2014.

While the hope for QE3 is high, we did find some who don't think QE3 is coming at next week's meeting.

"I am still not in the camp that I believe this number is going to cause the Fed to do another round of quantitative easing balance sheet expansion," Blitz said. "I do believe that it is enough weakness and that they are itching to do something to help boost employment, such as extending the guidance for how long there'll be zero interest rates."

Economists at Nomura Securities also said the report wasn't weak enough to stoke another round of quantitative easing. "Today's report was not sufficiently weak to change our expectations that the Fed will extend the forward guidance about the likely path of the federal funds rate but will not introduce QE3 at the upcoming September meeting," they said.

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