So much for the Federal Reserve’s idea that the U.S. economy is prepared for a rate hike…
Shortly after the U.S. announced that employers added 155,000 jobs in August 2016 (missing estimates for 181,000) the odds of a September 2016 rate hike dropped to 18% from 82%.
Of those jobs, some of the biggest gains were from temporary employment. Bars and restaurants added 34,000 jobs, leisure and hospitality added 29,000 jobs, and retailers added 15,100 jobs.
Meanwhile, the manufacturing sector (struggling with a weaker economy and falling oil prices) cut 14,000 jobs.
However, it isn’t just the jobs number that’s troubling.
While the unemployment rate remained flat at 4.9%, missing estimates for 4.8%, wages only grew at 0.1%, also missing expectations. It was also down sharply from the 0.3% wage growth rebound for July 2016.
Average weekly earnings dropped sharply from $884.08 to $882.54 – pushing the annual growth rate to its slowest pace since 2014.
Meanwhile, the labor participation rate remained flat at 62.8%, as the number of adults no longer in the labor force jumped by 58,000 Americans to 94.39 million.
The U6 unemployment number also held steady at 9.7%.
If unemployment were truly on the mend, inflation would not be stuck at 1.6% either. It would be closer to the Fed’s healthy target rate of 2%.
So what does this mean to the Federal Reserve?
In August, Janet Yellen noted, “I believe the case for an increase in the federal funds rate has strengthened in recent months.”
She highlighted the improvement in unemployment after the U.S. added more than a half million jobs in June and July. She also found “solid growth” in consumer spending to warrant a potential rate hike at the September 2016 meeting.
However, the latest jobs data and wage growth news conflict with her position.
Consumer spending may have ticked higher, but GDP growth of 1.1% isn’t an encouraging sign. Neither is the fact that the ISM Manufacturing Index showed sharp contraction for August 2016.
In fact, The Institute for Supply Management’s index for manufacturing activity slumped to 49.4 in August from 52.6 in July. (Anything under 50 is a sign of contraction.) Over the last 12 months, the index has averaged 50.2, which barely falls into expansion territory.
That number alone should be enough for the Fed to be cautious in September.
On top of all of that, there was further decline in second quarter productivity to -0.6%, marking the biggest decline in the number since 1979. A year earlier, productivity fell -0.4%, marking the first decline in three years.
Given the stark reality of the latest jobs news, low GDP growth, poor wage growth, productivity, and the fact that U.S. elections are nearing, we continue to believe the Federal Reserve will not raise rates this year.
The good news is, even with bleak economic statistics, there continues to be little negative impact on the broader U.S. markets.