Should the Decline in Jobs Growth Be a Concern?

September 9, 2014

Last Friday, the Labor Department released the jobs report for August. This widely followed monthly report contains both the unemployment rate and the number of nonfarm jobs created during the prior month. Analysts expected a drop in the unemployment rate from 6.2% to 6.1% and they got it. The drop was mainly due to a decrease in the labor participation rate, which has been trending lower as more and more boomers reach retirement age.

For the jobs reports, analysts were way off with their forecast. Analysts were expecting 230,000 new jobs, but only 142,000 new jobs were created. The stock market actually went up following the news because investors viewed slowing jobs growth as a reason that the Federal Reserve would delay interest rate increases.

Yet, there are additional reasons that the market can shrug off the below expectations report. First, one month does not make a trend, and the trend continues to be a very good one. Since the recovery began, new job growth has averaged 132,000 per month, so the current report is still above the trend. In fact, job growth averages over the last trailing 3 months, 6 months and 12 months have all been above trend with average gains of 207,000, 226,000 and 207,000, respectively.

August job reports have historically been followed by upward revisions. The first report is a very good estimate of the jobs picture, but it isn’t final and can be materially revised. According to the Wall Street Journal, the August jobs reports has been revised upward in 12 of the last 15 years. More recently, the August jobs report was revised up by an average of about 85,000 jobs over the last three years. We’ll find out in the future if this last report will be revised up, but history is on its side.

In Europe, the European Central Bank met last week for a routine meeting and surprised investors with a reduction in interest rates. Following their credit crisis, where austerity was the preferred method to clean up fiscal issues, the region has struggled to spur growth and inflation has been quite low. Further monetary stimulus is expected in the future.

Finally, we ended the week with two surprise developments in some of the global conflicts we have been tracking. In Ukraine, pro-Russian rebels agreed to a temporary cease-fire with Ukraine. All sides are viewing the deal with skepticism and the U.S. and Europe continues to impose economic sanctions on Russia.

At a NATO conference, ten nations, including the U.S., have teamed up to form a core coalition of countries cooperating to battle the Islamic State of Iraq and Syria (ISIS). While no Middle Eastern country is part of the core coalition, Iran is said to be sharing intelligence and working with the U.S., Iraq and the Kurds. ISIS continues to be viewed as a destabilizing threat to many nations in the Middle East, which is driving together former adversaries.

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