Each monthly jobs report tends to get heralded as the most important economic indicator EVER.
The two headline numbers – unemployment rate and job gains – are treated as perpetual game changers for the economy and politics. Stock market traders nervously anticipate the report on the first Friday of every month, while journalists pore over the numbers, searching for a story. Last year, President Obama’s re-election chances even hinged at times, it seemed, on the monthly figures.
Yet the report’s power is often oversold. In recent years, the report typically confirmed the obvious: a grindingly slow recovery from the 2008 financial meltdown, as well as a high likelihood of revisions in the months that follow.
But the August jobs report – out tomorrow – might finally live up to all the hype. This is the last jobs report before Federal Reserve officials meet on Sept. 18 to decide the fate of their major economic stimulus push. Each month the Fed has been buying $85 billion worth of bonds, pushing more money into the economy and putting downward pressure on interest rates.
Chairman Bernanke has said the central bank will start to reduce the size of its monthly purchases and consider ending the program when unemployment hits 7 percent.
Consensus forecasts have the unemployment rate holding steady at 7.4 percent, while payrolls grow by 175,000. Hitting those numbers would likely encourage the Federal Open Market Committee to begin the process of unwinding QE3, or the third round of “quantitative easing.”
“It exceeds the usual hype because the FOMC members have had this very public discussion about their intent to begin tapering,” said Patrick O’Keefe, director of economic research at the financial advisory firm CohnReznick.
Scott Anderson, chief economist at the Bank of the West, concluded, “The August report is probably more important than some others we have received lately.”
UNDERSTANDING THE HEAVY-DUTY DATA
But economists know this goes beyond the Fed. This is the last jobs report (potentially) before the U.S. bombs Syria for its use of chemical weapons, before the start of fiscal 2014 on Oct. 1 without an actual budget in place; and before the opening of Obamacare health insurance exchanges next month.
Here are five big questions to answer when Friday morning’s numbers arrive:
* Did we meet expectations? It’s not just the timing of the taper, but how much the Fed decides to trim from its buying of Treasury notes and mortgage-backed securities.
Anderson of the Bank of the West said a consensus number suggests the wind-down will be announced this month, although it might occur anyway “if the Fed sees its credibility threatened in any way by a further delay in executing some reduction in asset purchases.” He estimates a $20 billion monthly reduction in bond buying.
But if the job numbers underwhelm, Anderson predicts the taper could be scaled back to $10 billion a month.
Jerry Webman, chief economist at Oppenheimer Funds, described this possibility in response to poor employment numbers as the “token taper.” “Anything below 150,000 would be a disappointment,” Webman said. “Anything below 100,000, we would gasp at that – and the market would gasp at that.”
* How does the stock market react? Webman noted there is a kneejerk response in which stocks plunge at the mere insinuation of QE3 coming to an end. After Bernanke discussed the idea at a June 19 press conference, the S&P 500 index tumbled by 4.77 percent over the next three days.
The financial markets would lose a source of stimulus if QE3 gets pulled back. In this case, job growth – a positive – is treated in the short-term as a negative. If the stock market is sipping from the Fed’s punch bowl, the central bank has decided to offer instead a beverage with lower sugar content. The sugar rush isn’t as great for the markets – but it’s healthier for the economy in the long-term.
* How good are the jobs? There’s a huge difference between the wages for assembling a Big Mac and a Mack truck. Factory jobs pay more – a point that President Obama constantly repeats.
The manufacturing sector was adding workers at an average clip of over 12,000 a month. But in the past three months, factory employment inched up by a mere 3,000.
* What about labor force participation? In a Tuesday speech, San Francisco Fed President John Williams called the unemployment rate “the best overall summary statistic.”
But the unemployment rate offers an incomplete view of the recovery, according to the weekly commentary by Scott Brown, chief economist at Raymond James & Associates.
Fewer Americans belong to the labor force. Over the last four years, the labor force participation rate has fallen to 63.4 percent from 64.6 percent, according to the Bureau of Labor Statistics. So the unemployment rate has fallen in large part because fewer people are actively seeking work.
Some decline in labor force participation comes from an aging population that has retired. “However, most of the decline in participation is due to discouraged workers,” Brown wrote. “If an individual gives up looking for a job, that person is no longer officially ‘unemployed.’”
Brown noted that the job turnover rate and the number of Americans in part-time jobs for economic reasons remain near historic highs. All of this suggests – despite the top-line unemployment rate – a lingering problem.
* What impact does Obamacare have? The 2010 overhaul of 16 percent of the U.S. economy is bound to impact things. Businesses complain about the uncertainty created by the requirement that Americans buy health coverage, or individuals and employers must pay a tax penalty.
One easy indicator is how many jobs the health care sector generated in August. It produced, on average, 21,000 a month over the past 12 months. But in July, that number was a paltry 2,500.
The August figures should show whether this figure is a benign blip, or the start of a dangerous trend this past July. “Other than June 2003, when the industry posted a loss,” observed O’Keefe, “this was the smallest month-on-month change on record.”