Jobs Report Leaves QE3 Door Open

by Dan Burrows | August 3, 2012 12:19 pm

The good news in Friday’s jobs report was that there was no bad news. And — at least for anyone pining for more easing on the part of the Federal Reserve — the data was hardly strong enough to sway the central bank against it.

Forget that the headline unemployment rate rose to 8.3% from 8.2%. That was the result of rounding up a slim fractional change into a 1-decimal-point reading. The important number was much stronger-than-expected payroll growth — and underlying data and revisions that left the all-important trend still looking weak.

Non-farm payrolls grew by 163,000 last month, far better than economists’ average forecast for just 100,000 new jobs. Strip out the effects of local, state and federal layoffs, and non-farm private payrolls increased by an even better 172,000 vs. expectations for 105,000.

So the good news is jobs growth was much better than forecast last month.

And the bad news is jobs creation still is terrible.

The economy was adding an average of 275,000 new jobs a month at the start of the year — a decent figure considering that we need something like 125,000 to 150,000 just to keep up with new people entering the work force.

So although the July figure is an improvement, it’s not a rate that’s going to put millions of unemployed Americans[1] back to work anytime soon.

Furthermore, at this stage of a normal recovery in the business cycle[2], we should be adding 220,000 jobs a month. There was no growth in hours worked, and wages actually slipped when adjusted for inflation. And the revisions to the previous two months essentially were a wash.

The trend, which is stagnant at best, is not our friend.

All of which leaves the Fed with its finger on the easing button, especially in light of the European Central Bank’s own pledge that it’s also ready to act — if and when it decides to act[3].

The Fed’s language this week makes plain that it no longer needs to see deterioration in the economy, only a lack of improvement. The latest job figures bolster the lack-of-improvement case. As for the ECB, it’s willing to make a move — but only after policymakers in Germany, Spain and Italy move first. Countries have to ask for help from European rescue mechanisms — and, of course, accede to strict conditions.

The upshot of which is the ECB made it clear it wouldn’t ease in the form of buying bonds until September. And the next Fed meeting, in which it will update its forecast and hold a press conference, is scheduled for September, too.

Markets no doubt will spend August fretting over Spain’s borrowing costs, the minutes of the latest Fed meeting, due Aug. 22, and the big central bank shindig at Jackson Hole at the end of the month.

But the big moves — by both the Fed and the ECB — probably won’t come until mid-September, if at all.

If either bank pulls the trigger earlier — in a sort of shock-and-awe surprise — well, that just means the global economy has edged so much closer to the cliff that we’ll all have bigger worries, anyway.

  1. millions of unemployed Americans:
  2. a normal recovery in the business cycle:
  3. if and when it decides to act:

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