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Big Jobs Miss Muddles Picture for Economy and the Fed

Big Jobs Miss Muddles Picture for Economy and the Fed

Saturday, 4 September, 2021 - 04:45

The highly anticipated US jobs report for August should make us feel sorry for those having to navigate through the flood of economic data, be they analysts or, more importantly, policy makers. With another set of data subject to divergent interpretations, the post-pandemic economic landscape remains both puzzling and uncertain.

Let’s start with the main takeaways:

Constituting a big miss relative to expectations, the headline number of Friday’s employment report was disappointing. Job creation came in at just 235,000, compared with a median expectation of 733,000, which itself came from a wide range of analyst forecasts (the lowest of which was actually above what materialized).

The initial shock of this unfavorable data miss was partially offset by revisions to previous months, which took the three-month average to a more respectable level of some 750,000, given the now 2 million jobs created in June and July.

While August job creation was relatively low, the unemployment rate fell 0.2 percentage points to 5.2%, and hourly earnings rose more than consensus expectations (0.6% compared with 0.4%, month-on-month).

Within the total unemployment rate, already-concerning inequality indicators worsened, with the rate for White people falling from 4.8% to 4.5% while that for Black people rose from 8.2% to 8.8%.

Labor force participation was unchanged at 61.7% despite a job deficit of more than 7 million workers relative to pre-pandemic levels.

Some of these indicators can be reconciled by incorporating the impact of the Covid-19 delta variant on the service sector, especially given the disappointing employment numbers for retail, leisure and hospitality. Others, including the headline job creation number, can be treated as temporary “noise” in light of a still solid multi-month average. But the data also give room for more structural and secular explanations that point to the risk of a more difficult outlook.

Chief among these interpretations is the continued challenges the labor market is having in matching what seems to be ample labor supply to ample labor demand of more than 10 million available positions, according to the Labor Department’s Job Openings and Labor Turnover Survey.

Underlying this is concern about skill mismatches, a less-employment intensive evolution of the economy and mobility issues. Coupled with multiplying indicators of both higher input costs for many companies and greater pricing power, this fuels the notion an economy facing increased stagflationary winds.

Both analysts and policy makers need to sort through such competing indicators and interpretations. If they were to rely on market signals, the reaction of most asset classes seems to favor the interpretation that the big jobs disappointment was an aberration and will prove temporary. Yet these market signals themselves are heavily distorted by what remains enormous and ever-increasing direct Federal Reserve intervention in the pricing of a wide range of assets.

The interpretation challenge is especially acute for the Fed given that it is considering gradually reducing those monthly purchases of $120 billion of assets.

Rather than clarify the situation, Friday’s jobs report muddles the evidence for a decision under the Fed’s new monetary policy framework, which is backward looking as it is based on outcomes rather than projections. Indeed, central bankers within what has become an increasingly divided Fed will find competing support from the data for their competing positions.

Having said that, the compositional issues within the FOMC membership suggest that Friday’s employment report may well push back expectations of a taper announcement from September to December. In turn, this will delay the start of the actual taper from this year to 2022, providing financial markets with an even longer path of massive liquidity support.

Other data releases in the meantime could possibly change this timetable, unless of course the Fed preempts this by deciding to supplement its new framework with a balanced consideration of the risks and opportunities ahead — a step that would call for a September taper and whose actual probability with this Fed is now even lower.


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