What does the August jobs report mean for the Fed?

Unemployment Friday, and according to the Bureau of Labor Statistics, the U.S. economy added 173,000 jobs in August while the unemployment rate dropped to 5.1 percent — the lowest it’s been since April 2008.

Considering we’ve been averaging gains of 247,000 per month for the past year, August’s jobs numbers may not, at first blush, seem all that strong. However, June and July’s jobs numbers were both revised upward — 44,000 more jobs added to the economy than previously reported.

With healthy upward revisions and a drop in the unemployment rate, one might even say that the economy is humming. And some did, including a former member of President Obama’s Council of Economic Advisors:

Just where is that progress? August saw significant growth in health care and social services — child day care and services for the elderly and disabled — with the addition of 56,000 jobs in those sectors, 41,000 of which are in health care. These numbers are indicative of a larger trend: Over the year, health care has added 457,000 jobs and social assistance another 107,000.

Professional and business services also saw real gains — 33,000 new jobs in August and 641,000 over the year. Among them, health care, social assistance and business services account for about a third of the roughly three million jobs created in the past year. By contrast manufacturing and mining haven’t added any.

Another encouraging fact from August’s jobs report: the drop in the number of people not officially counted as “in the labor force,” because they haven’t looked for work in the past four weeks, but who say they want a job. That number has rarely dipped below six million, but did in August.

And who, you might ask, dropped out of this category? Two possible groups. First, people unemployed for so long that they have finally given up hope and decided, “Enough already! I don’t even want a job anymore,” or some variation thereof, and said as much to the BLS person who administered the survey to them in August. Second, more and more Baby Boomers are hitting retirement age — 10,000 reach 66 every day — and are simply deciding to call it a career. So they’re “not in the labor force” (not looking for work) and they have no intention of doing so.

Finally, in August we saw another marker of economic stability: after a 6-cent raise in July, average hourly earnings rose another 8 cents in August to land at $25.09. Over the year, hourly earnings are up 2.2 percent, compared to a 12-month inflation rate barely above zero. And if you take the August numbers seriously, an 8-cent wage bump would translate into an annual pay increase of nearly four percent.

A final bit of statistical good news: our Solman Scale’s U7, which counts the officially unemployed and then adds part-timers looking for full-time work and anyone who says they want a job but don’t have one (that 5.9 percent figure from above), fell from 14.23 percent one year ago to 12.48 percent. To put this in perspective, when we began calculating the U7 back in August 2011, it stood at 18.29 percent. So yes, we’ve come a long way.

Of course, we probably shouldn’t look at a jobs report without mentioning the Federal Reserve’s plan to increase interest rates in September. For months, the Fed suggested it would increase interest rates from their near-zero levels, only to later decide that there was too much slack in the labor market to do so. While some economists argue that the Fed won’t hike interest rates with a volatile stock market and a stumbling Chinese economy, others say the labor market is strong–strong enough that the Fed should go ahead and hike.

Kevin Hassett of the conservative American Enterprise Institute doesn’t see the report being “good enough for the Fed to hike interest rates at the next meeting in September.” He explains that because of seasonal variation, August is historically difficult for the BLS to determine the number of jobs added. In the following months, economists expect to see the number of jobs revised upwards some 70,000. And as a result of that prediction, this jobs report “exists in between tenuously positive and tenuously negative,” says Hassett. The Fed, however, won’t know until the job revisions, not to be released until after they meet.

As to what he thinks the Fed ought to do? That’s simple. “The Fed needs to normalize policy,” says Hassett, though he admits “there’s never a good time for that.” On the other hand, says Hassett, a 5.1 percent unemployment rate falls into the Fed’s definition of full employment.

Others, like the left-leaning Economic Policy Institute’s Elise Gould, don’t think it’s time for the Fed to make a move on interest rates.

Describing the August jobs report as neither good nor bad, but “meh,” Gould says wage growth over the past year is anemic and that the number of jobs created on average this year is 212,000 per month, down noticeably from the 260,000 we all saw last year. This, she believes, indicates a slowdown in the recovery.

“The Fed, I applaud them. They’ve been doing the right thing [by waiting to raise interest rates],” says, Gould adding, “Don’t get impatient for the sake of getting impatient.”

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