The labor market’s hot streak is over! After six straight months of job gains above 200,000 — the longest such stretch since 1997 — payrolls in August rose by a more modest 142,000, the smallest increase of the year and well below the consensus forecast of 230,000.
Making matters worse, the gains in the previous two months were revised lower by a net 28,000 jobs. And while the unemployment rate fell from 6.2 percent to 6.1 percent (actually, 6.149 percent before rounding), that was only because 64,000 people left the workforce. The labor force participation rate edged a bit lower, to 62.8 percent.
“The report was clearly disappointing and contrasts with the otherwise strong economic data we have seen recently,” economists at Bank of America Merrill Lynch wrote to clients.
August’s headline number isn’t great — only two months over the past two years have been worse — but it’s not terrible, either. It’s certainly no reason to get glum about the economy, much less freak out about another unexpected slowdown. Here’s why.
1. It’s just one month. If you follow these monthly jobs reports at all, you’ve heard it a thousand times: One noisy reading isn’t enough to determine a trend, or in this case, to definitively signal that one is ending. That’s certainly true for last month. “We advise not overreacting given the volatility of nonfarm payrolls and possibility of an upward revision — August payroll growth has been revised up in 12 of the last 15 years by an average of 31,000,” the Merrill Lynch economists wrote to clients. Check back later this year to get a better sense of what’s happening in the job market.
2. Again, it’s August. Seasonal adjustments might be at play, as teens and college kids go back to school. “The decline in participation was concentrated among teenagers and those in their early 20s,” the Merrill Lynch economists noted. The number of 16- to 19-year-olds in the labor force fell by 95,000, more than the overall decline of 64,000. “The participation rate for those above 25 actually increased.”
3. The hiring trend line still looks solid, as does other economic data. The past three months have averaged increases of 207,000, just under the 215,000 average for the year so far. “In that regard,” UBS economist Sam Coffin wrote Friday, the August number “looks like a correction rather than a genuine shift in hiring — a return to trend after weather-boosted hiring in Q2.”
Seasonal adjustments and other special circumstances might also explain the numbers for some sectors that left economists perplexed. A dropoff in manufacturing relative to recent trends “doesn’t accord with recent signals from the ISM or auto sales and output, and it appears to be a temporary effect of the timing of factory shutdowns,” as fewer workers got laid off in July and got rehired in August, Coffin wrote.
Similarly, weakness in retail hiring might not signal a longer-term trend. The sector, which had been adding an average of about 22,000 jobs a month, lost 8,000 jobs in August. “A large chunk of this could be due to the labor strike at the New England supermarket chain Market Basket that employs 25,000 people,” economists at BNP Paribas suggested. And, UBS’s Coffin wrote, “with stronger consumer confidence and a rebound in spending likely, we doubt the slower pace will persist.”
Doug Handler, chief U.S. economist at IHS Global Insight, said the disappointing gap between the reported payroll increases and the expectations for gains of more than 200,000 jobs comes down in part to these two sector issues. “If allowances are made for these two circumstances, the report’s classification can be upgraded from ‘disappointing’ to merely ‘fair,’” he wrote. “August’s employment report is clearly not as strong as the previous six months, but it’s not weak enough to declare that a turning point is imminent with respect to economic growth. We look forward to a September report that will demonstrate the August result to be a blip rather than a trend.”
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