September Rate Hike Unlikely After Tepid Job Growth

Case strengthens for December rate hike if inflation and job growth firm up

Data on U.S. payroll growth for August 2016, released by the U.S. Department of Labor on September 2nd, 2016, shows that job growth slowed in August after booming in June and July, as employers added 151,000 jobs against expectations for 180,000. The data underscores forecasts that job growth may be moderating, lowering the chances of a Federal Reserve interest rate hike at the next Federal Open Market Committee (FOMC) meeting scheduled for September 20-21st, 2016. Moreover, the August jobs data has reinforced market expectations that the Fed will push off a rate increase until December 2016 at the earliest. Other officials, including Fed Board governors Daniel Tarullo and Lael Brainard, have said the Fed will wait until inflation firms up before acting to raise rates for the first time since December 2015.

Source: U.S. Labor Department
Source: U.S. Labor Department

The monthly gain of 151,000 jobs was neither strong nor weak, yet enough to settle the Fed’s dilemma about whether the labor market can withstand another interest-rate increase. The unemployment rate was unchanged from the prior month at 4.9%, the Labor Department reported. A more holistic rate that included discouraged workers and those holding part-time jobs for economic reasons held steady at 9.7%. Among demographic groups, the unemployment rate for those without a high school diploma jumped from 6.3% in July 2016 to 7.2% in August 2016. Investors, who were eager for signals on the rate outlook, immediately cut the probability of a September hike from 27% to 12%.

Market watchers believe that the economy is nearing full employment and that employers need to add fewer jobs to absorb new entrants into the labor pool. Employers have added jobs at a monthly pace of 182,000 so far in 2016. July and August averaged 263,000, though the average for the year is 181,500 and 204,000 for the past 12 months. Private job growth was just 126,000 in August 2016.

Source: The Wall Street Journal
Source: The Wall Street Journal

Average hourly earnings for private-sector workers rose 0.1% in July 2016 and 2.4% versus August 2015 and a slowdown from July’s 2.7% annual gain, which was the best in seven years. The slower growth in part reflects strong August hiring in low-wage fields.

The services sector accounted for nearly all employment gains last month. Employment at restaurants grew by a seasonally adjusted 34,000; professional and business services jobs grew by 22,000; Wall Street-related positions grew by 15,000, Health care also contributed 14,000, and social-assistance jobs grew by 21,700. In contrast, the manufacturing sector shed 14,000 jobs and 6,000 construction jobs were cut. On the upside, the household survey showed full-time jobs increased by 319,000, while part-time positions declined by 388,000.

Case strengthens for December rate hike

At the recent Jackson Hole conference, Fed Chairperson Janet Yellen said that an improving labor market and signs that inflation is firming, thus strengthening the case for a rate hike. She, however, did not comment on the timing of the increase. Despite the strong labor market gains, the GDP growth has been tepid. The most recent estimates put GDP growth in Q2 FY16 at just 1.1%; the Fed’s preferred inflation measure remains stuck at 1.6%, well below the target of 2% expected to accommodate a rate hike.

While the scenario for two rate hikes in 2016 now looks like a distant possibility, it remains to be seen whether the GDP growth rate in Q2 FY16 and Q3 FY16 and inflation will firm up enough to prevent the Fed from hitting the pause button on the rate hike decision.

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