The Fed: A Whole New Ballgame

[EV_Ares]

The surprising weakness in the August jobs report leaves Bernanke & Co. little choice but to cut rates at the September FOMC meeting
by Michael Englund

The stunning weakness in the U.S. nonfarm payroll figure for August revealed in the month's employment report, released Sept. 7—and the downward revisions to job growth in July and June—is a likely game-changer for the Federal Reserve's strategy in managing the credit crisis and its potential impact on U.S. growth. The central bank's internal desire to avoid reductions in the Fed funds rate target will likely need to be shelved for now.

The Fed would probably appear too aloof if it passed through the Sept. 18 Federal Open Market Committee meeting without a cut in the target. We still suspect that Ben Bernanke & Co. is loath to cut the Fed funds rate target, but they can clearly raise their perceived assessment of economic risks sufficiently to justify a rate reduction, and they would face severe criticism if they ignored the August jobs report.

And the report was surprisingly weak, clearly demonstrating that economists and investors had misjudged the risks in the report. Nonfarm payrolls fell 4,000 in August from revised gains of 68,000 in July and 69,000 in June (previously they were 92,000 and 126,000, respectively), for a net revision of –81,000. The unemployment rate was steady at 4.6%, from 4.6% in July. Average hourly earnings were up 0.3%, which was the same as in July. The average workweek was stable at 33.8 hours.

Jobs Report Reveals Widespread Weakness
In the guts of the report, private payrolls rose 24,000 with manufacturing payrolls down 46,000 and construction down 22,000. Employment in the services sector was up 60,000, with financial services flat. Government payrolls fell sharply, falling another 28,000 after a surprising 52,000 drop in July (from –28,000 previously).

The jobs report revealed widespread weakness that will filter through the other monthly indicators, though strength in other source data cap the downside August risk. Indeed, with strength in all the other available August data for the economy outside of housing, the weakness in this report adds risk largely by throwing a monkey wrench in the analysis of the other August figures, and hence boosting risk with each remaining August report.

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