Friday’s highly anticipated jobs report showed unemployment falling to the rate the Federal Reserve has guessed represents full employment, but it also contains enough signs of trouble from a slowdown in China to cast into doubt on an interest rate hike later this month.
Economists instantly reacted to Friday’s report with conflicting conclusions about what it would mean for the Fed’s decision at its Sept. 16 and 17 meeting, when it will consider raising its short-term interest rate target from zero for the first time since the financial crisis.
At 5.1 percent, unemployment in August is below Fed members’ June projections for the end of the year. It’s also within the 5 percent to 5.2 percent range that officials guessed represented the long-run rate.
But it also showed clear signs of the problems that overseas weakness has caused for the U.S., dynamics that some investors are worried could worsen following the past few weeks of domestic stock market volatility.
U.S. manufacturers cut 17,000 jobs in August, the first big loss in manufacturing jobs to follow the rapid appreciation of the dollar this year. The dollar’s movement reflects slowing growth overseas and, more recently, the People’s Bank of China devaluing the yuan. A rising dollar makes U.S. exports more expensive to the rest of the world, while lowering import prices and pushing down domestic inflation.
“Asian currency devaluations, an overly strong dollar, and weakness in China are all taking their toll on factory jobs,” said Scott Paul, president of the industry group Alliance for American Manufacturing. “Developments in September could make matters even worse.”
The energy industry also continued to hemorrhage jobs in August. It saw a decline of 9,000 mining jobs, bringing total losses to 90,000 since the start of the year.
Those layoffs, which have been concentrated in the support services for oil drillers, follow the collapse in the price of oil, which is thought to be driven in part by falling demand for commodities in China and elsewhere overseas. A barrel of Brent Crude oil has dropped in price from over $100 last summer to around $50.
The Fed has noted concern about American oil producers, and the rising dollar hurting the competitiveness of U.S. manufacturers, throughout this year. Even as the economy nears full employment, those overseas factors may delay their move away from their crisis-era zero-rate target.
The Fed has said it is looking for two factors before raising rates: Further job growth, and reasonable confidence that inflation will rise to its 2 percent target. Slowing economic growth and job gains would likely hold down inflation.
“The latest jobs data will leave everyone maintaining their position on the Fed,” Mizuho Securities chief economist Steven Ricchiuto noted. “Not the decisive data the Street wanted.”
Stock markets opened sharply lower Friday morning, and the Dow Jones Industrial Average fell by over 200 points or more than 1 percent in early trading. Yield on Treasury bonds fell.
Noting that August jobs reports have often been subsequently revised upward in recent years, High Frequency Economics chief U.S. economist Jim O’Sullivan wrote that “the employment data generally look more than strong enough to support the start of Fed tightening at this month’s meeting.”
“Nonetheless, we expect officials will hold off for now due to the risks raised by weakening in global growth and turmoil in markets,” he wrote in response to the jobs numbers. “We expect they will be tightening very soon.”
