August Jobs Report Misses Views, Paints Sad Picture for Fed

The August jobs report released by the Labor Department on Friday showed the economy added just 173,000 jobs, far fewer than the 220,000 economists expected. The headline unemployment rate fell to 5.1%, which the lowest level in seven a half years. Economists polled by Reuters had forecast the rate would fall 0.1% to 5.2% from a month earlier.

Beyond the headline unemployment number, the August jobs report paints a bleak picture for the Federal Reserve, which is weighing the timing and trajectory of a badly needed rate hike later this year. Real unemployment clocked in at 10.3%, and wages have remained in the range of stagnant to barely gaining since 2008. In August, average hourly earnings for all employees on private nonfarm payrolls rose by just 8 cents to $25.09, which followed a 6-cent gain in July. On a year-over-year basis, hourly earnings have risen by just 2.2%, while average hourly earnings of private-sector production and nonsupervisory employees increased by just 5 cents to $21.07 in August.

The prior two months of wage growth–though abysmal by historical measures–actually represented relatively large gains to prior months. Basic principles of supply and demand hold that if the labor market strengthens through monthly job gains and a falling unemployment rate, then workers’ wages rise as employers compete for qualified workers. However, due to the 37-year low civilian labor force participation rate (62.6%), the less-cited but arguably more important employment-population ratio (59.4%) and quality of jobs created, wages have remained flat.

While the U.S. economy has technically regained all of the 8.8 million jobs lost during the financial crisis, the quality of the jobs created has been low and the economy is a part-time animal. The number of persons employed part time for economic reasons–sometimes referred to as involuntary part-time workers–stood at 6.5 million in August. These workers prefer and are searching for full-time employment, but report that their hours had been cut back or were unable to find a full-time job.

Another 1.8 million persons were marginally attached to the labor force, or workers who were not in the labor force wanted and were available for work and had looked for a job sometime in the prior 12 months. These Americans are not counted when calculating the headline unemployment rate because they quit on the American dream 4 weeks before the survey.

Of those nearly 2 million, 624,000 were discouraged workers in August, or persons not currently looking for work because they believe no jobs are available for them. This groups is disproportionately black, young and male. The unemployment rate for black Americans jumped to 9.5% in August from 9.1% in July.

Meanwhile, on Wednesday, payroll processor ADP released the closely-watched National Employment Report, which revealed U.S. private sector job creation in August cooled at 190,000, missing economists’ expectations. Economists surveyed by Reuters expected the report by the payrolls processor to show a gain of 201,000 jobs. The policy-making Federal Open Markets Committee meets September 16 and 17.