The Friday morning after a major national holiday might be a slow one, but that won’t stop the economic news cycle. At 8:30 a.m. on Friday, the Bureau of Labor Statistics will release the monthly jobs report for June, an indicator that has taken on added importance in recent weeks because the Federal Reserve has tied its plans to slow the pace of its stimulus purchases to the jobless rate.
Last month the BLS reported that the economy added 175,000 jobs and the unemployment rate rose to 7.6 percent as workers re-entered the labor force. Economists expect Friday’s report to show 161,000 new jobs and unemployment declining slightly to 7.5 percent.
The key threshold for unemployment is 7 percent: Federal Reserve chairman Ben Bernanke said at a June 19 press conference that the Fed plans to have lowered its currently $85 billion monthly bond purchases to zero by the time unemployment rate is in the “vicinity” of that number.
According to the Fed’s most recent projections, a 7.5 percent jobless rate could be reached by the end of this year. Assuming that the Fed slowly tapers its purchases down from $85 per month, that means that it might begin the process of winding down the stimulus as early as next month, a prospect that has many traders on edge. If unemployment does drop to 7.5 percent and the rest of the report shows no signs of looming problems in labor markets, that could harden the perception that the Fed will begin tapering in September.
Although a market-moving event, the jobs report, and the unemployment rate in particular, is considered one by analysts to be a lagging indicator of economic growth. Nevertheless, it is what the Fed has chosen to use to provide guidance about its policy. At his press conference, Bernanke noted that the Fed would not rely solely on the unemployment rate, but also consider whether it “fairly represents” the state of the labor market. Among the other indicators the Fed would look to, Bernanke suggested, would be “underemployment, part-time work, people leaving the labor force, reduced participation, long-term unemployment.”
Janet Yellen, the vice chair of the Fed’s Board of Governors, has suggested that the number of workers quitting their jobs, which has been rising in recent months, could provide another clue about the health of the labor market.
Regis Barnichon of the Brookings Institution has a model of the unemployment rate based on some of the factors mentioned by Bernanke that has proven more accurate than the consensus estimate of economists in estimating the unemployment rate. Barnichon pegs Friday’s number at 7.5 percent, in line with expectations, and anticipates the rate falling to 7.1 percent by the end of the year — near the Fed’s critical line.
After December, though, Barnichon’s model shows unemployment rising back to 7.5 percent in 2014 and then declining only slowly. If that prediction is accurate, an unemployment reading of 7.5 percent on Friday will not be a guarantee that the Fed quickly moves to slow down its stimulus.