The Numbers Are In

Today’s Unemployment Report Is an S.O.S. to the Fed

The U.S. created only 169,000 jobs in July, fewer than expected.

What a difference a year makes. Last fall, the Bureau of Labor Statistics’ monthly employment reports assumed a totemic importance in the political season. The noisy, frequently adjusted figures had the capacity to move presidential polls. The financial markets could afford to ignore the latest upticks or downticks in the unemployment rate, but the political markets couldn’t.

This fall it’s a different story. Given the backdrop of foreign turmoil, the prospect of war in Syria, and an economy chugging along in a low gear, the monthly status update on the labor market barely resonates in the nation’s political capital. But financial markets have been eagerly awaiting the data. Why? The Federal Reserve has been telegraphing for the last several months that it could start to dial back its efforts to stimulate the economy. Should the jobs picture improve and the unemployment rate continue to tick down, the Fed could start to taper its purchases of bonds and mortgage-backed securities as early as September. And that move would be hugely consequential for markets, influencing the price of bonds, stocks, commodities, and gold. The conventional wisdom: a blow-out, highly positive jobs report would hasten the Fed’s efforts to taper, while a crappy one would mean the Fed would hold off for several more months.

This morning, however, the Bureau of Labor Statistics served up a meh burger, slathered with blah sauce. And the offering is unlikely to clear up lingering confusion as to whether and when the Fed will ease up on its quantitative-easing efforts.

First, the headline. The U.S. economy created 169,000 payroll jobs in August. That’s neither too many to get excited about nor too few to get seriously bummed about. The unemployment rate, which is compiled from the separate household survey, ticked down to 7.3 percent from 7.4 percent. But there’s less than meets the eye to that figure. The payroll jobs number is compiled from a survey in which the BLS asks companies how many people they have on their payrolls. The unemployment rate is compiled from the so-called household survey, in which the BLS asks people whether they’re working, out of work, looking for work, etc. The unemployment rate is calculated by dividing the number of people who are out of work into the number of people who are in the labor force. So if the labor force shrinks—if people drop out, or quit looking—while the number of people working essentially holds steady or even falls, the unemployment rate can fall as well. And that’s precisely what happened in August. Check out this table. The size of the labor force actually fell in August by 312,000, while the number of people employed fell by 115,000. The labor force participation rate (the percentage of able-bodied adults in the workforce) fell as well.

Put another way, aside from the illusory decline in the unemployment rate, the data coming out of the household survey was quite poor. The Fed’s work stimulating the economy is hardly done.

There was also bad news in the payroll survey. Yes, the U.S. economy added 169,000 jobs in August. That’s the 42nd straight month of gains. Since February 2010, the economy has added 6.8 million jobs. But these monthly reports are only the first estimates. And the data is revised in each of the subsequent months. The revisions the BLS released Friday for June and July were disappointing. The June figure, previously thought to be a gain of 188,000 jobs, was revised down to a gain of 172,000. And in a somewhat ominous sign, the July figure, initially reported as a gain of 162,000, was revised to a gain of only 104,000. Put another way, the BLS looked back and found there were 74,000 fewer jobs than previously thought. Again, this is a sign that the Fed’s work stimulating the economy is hardly done.

There were a few mildly positive signs. Manufacturing added 14,000 positions. As has typically been the case, health care (32,000), retail trade (44,000), and professional and business services (23,000) added jobs in the month. And there are signs that government austerity—at least at the state and local level—may have run its course. I’ve dubbed this expansion the “conservative recovery,” because every month the private sector adds jobs while the public sector (federal, state, and local government) cuts them. That doesn’t usually happen in expansions. Between May 2010 and July 2013, government cut 1.177 million jobs, while the private sector added 7.07 million positions.

The sequester has put a dent into federal government hiring. But as states and cities move from deficits to surpluses, they’ve started to add positions after years of cuts. And in August, for the first time in recent memory, government employment significantly increased—by 17,000 positions. Federal government employment was unchanged, and states cut 3,000 jobs. But local governments hired 20,000 people—virtually all for educational jobs.

Overall the picture painted by the August jobs report is one of a labor market that is still struggling to shift into a higher gear, and one that needs all the help it can get. It’s only one data point, but it certainly makes it more likely that the Federal Reserve will start tapering its bond purchases later rather than sooner.