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Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, U.S., June 22, 2021.
August jobs report raises uncertainty ahead of Fed meeting
Friday’s new US jobs report showed that unemployment ticked down to 4.2% and employers added 142,000 jobs in August, lower than the 161,000 expected. The weaker-than-expected report is a continuation of a labor market cooling trend that has set off alarm bells that interest rates may have been too high for too long.
Look inside the numbers: The sector that saw the most job growth was construction, which gained 34,000 jobs, likely due to the Biden administration’s infrastructure spending. It was followed by health care, which added 31,000 jobs, and the public sector’s 24,000 new jobs.
Why it matters: The report was highly anticipated after unemployment spiked in July, leaving many wondering whether we were heading for a broader slowdown in the labor market – a key metric of how the Federal Reserve will steer interest rates when it meets later this month.
“Despite the headline unemployment number ticking down as expected, the details behind the jobs data were mixed,” says Eurasia Group’s global macroeconomics expert Babak Minovi. “Fed Gov. Christopher Waller gave some remarks later saying the jobs data now ‘requires action’ instead of patience, increasing the market's level of concern on the health of the economy.”
Although the jobs numbers were weaker than expected, the market didn’t miss the target enough to change projections, which still predict that the Fed will drop interest rates by at least 25 basis points when it meets later this month.
Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, U.S., June 22, 2021.
25 or 50? Jobs report likely to influence magnitude of Fed’s rate cut
Background: Unemployment has risen for four months in a row and is up almost a percent from its lows last year, which, according to Eurasia Group’s global macroeconomics expert Babak Minovi, is worrying because “rises in unemployment like this usually go hand in hand with recessions, and that’s certainly not our (or the market’s) base case.”
Why it matters: Fed Chair Jerome Powell has put the labor market at the heart of the central bank’s decision on when and how quickly to ease interest rates.
“Economists are expecting unemployment to stop its losing streak in August with a modest recovery, but another surprise worsening would be a warning sign to the Federal Reserve that the US economy is slowing down faster than intended,” says Minovi, who believes that under this scenario the Fed would cut interest rates by 50 basis points from its current 5.5% target rate, as opposed to 25. But, if the unemployment rate does improve as expected? “Markets will breathe a sigh of relief — for the time being,” says Minovi.
US President Joe Biden grapples with inflation.
Why job and wage growth in the US are freaking out investors
The jobs report for November came in hot Friday, revealing that wage and job growth in the world’s largest economy remain robust. Sounds like a good thing, right? Well, not when the US economy is reeling from decade-high inflation.
Markets cooled on Friday morning – and then recovered slightly – as investors got spooked by news that the US economy added 263,000 jobs in November while average hourly wages jumped 5.1% year-on-year, a key component of inflation. For context, between 2010-2019 average monthly job gains in the US came in at around 183,000. November’s unemployment rate, meanwhile, remained stubbornly low at 3.75% despite recent aggressive efforts by the US Federal Reserve to cool an economy set on fire by dual nightmares: the pandemic and war in Ukraine.
Indeed, this is not the news that Fed Chair Jerome Powell had been hoping for. After raising interest rates by 0.75 basis points four consecutive times in recent months, the dovish money man had set expectations for a more tepid rise of 0.5 percentage points when the Fed meets on Dec. 13-14. But some now suspect that this latest report could send Powell back to the drawing board to reconsider plans to dial back rate increases.
As ever, politicians will use the latest report to confirm their pre-existing views and try to gain a political edge. President Biden, for his part, touted the report as a sign of economic strength, while Republicans will double down on criticism of the White House’s early assessment that inflation would be “transitory.” That quip … did not age well.
Will Joe Manchin thwart Biden's spending? FDA credibility hit
Jon Lieber, head of Eurasia Group's coverage of political and policy developments in Washington, shares insights on US politics:
What does the disappointing jobs number mean for the Democrats' agenda?
Well, payroll employment in August came in well under expectations with under 300,000 jobs created. This is in contrast to the last several months, which really saw a torrid pace of job creation as the US started to recover from the pandemic and restrictions were lifted. With new mask mandates and the Delta variant spreading, Americans are slowing down their pace of activity and slowing down spending, which means you could see more economic volatility in the next couple of months. At the same time, Democrats are attempting to find consensus around a major new spending initiative, which would spend up to $3.5 half trillion over the next 10 years. This initiative isn't really about coronavirus pandemic recovery, or even stimulus, it's about expanding the size and scope of government for increased transfer payments and increased subsidies for education services and healthcare and also, of course, on infrastructure. The slowing jobs growth creates more fiscal space for Democrats to borrow more, and that's a real sticking point because you have moderates like Senator Joe Manchin from West Virginia, who says the US is already at their borrowing limit and shouldn't be borrowing more to spend money. This is going to be the major storyline in Washington for the next several months because it's also probably going to be the last big initiative of the Biden administration before the midterm elections next year.
Two top FDA vaccine regulators are about to leave this fall. How will this influence the vaccine rollout?
Well, the FDA has really struggled over the last year with vaccines and with the coronavirus pandemic. There's been mistakes and missteps along the way between the FDA and the Center for Disease Control, both around messaging, the science around the pandemic, and on things like testing kits, where there's been major screw-ups by the federal government. The two top vaccine regulators at the FDA announced they're going to leave, supposedly, according to some reports, because they felt like they were under political pressure to approve booster shots. The White House has said they plan on doing booster shots. They've already authorized them for people who have underlying conditions that make them more vulnerable. These two regulators leaving is just another bump in the road for the FDA. It's going to take a long time for the American health agencies to recover their credibility