The monthly jobs report released by the U.S. Department of Labor is an important indicator of how the economy is performing and where the markets might go. Improved employment rates and the creation of new jobs shows that the economy is improving. Falling jobs figures show that the opposite is happening. The latest August 2016 jobs report is neither good enough nor bad enough to give any clear signs of where the economy might be headed.
Some people would have liked to see a jobs report that goes strong in either direction. Certainty is a welcome feature for many investors. However, this August report keeps the future of the markets — and the Federal Reserve’s probability of raising interest rates — just as murky as it was before.
The monthly jobs report is a key indicator that could determine whether the Federal Reserve increases interest rates, as a fragile economy calls for low interest rates and a robust economy means interest rates can (or at least should) be set higher.
Inside the Numbers
Simply put, the numbers failed to meet expectations. The employment rate stayed flat at 4.9 percent for the third month in a row. The less impressive figure was the total number of jobs added. Jobs — officially called “nonfarm payrolls” — increased by a meager 151,000 on the month. Economists were expecting 180,000, so the actual figures fell well short of expectations.
That seems to be the norm for the month of August, as job growth expectations have missed on this month 10 times in the past 13 years.
Why It Matters
If the report were stronger, the Federal Reserve would have been more inclined to increase the interest rate. Since the report was so lackluster, experts predict the Federal Reserve is going to hold off for at least another month before making a decision. This has a direct effect on the stock market.
When the interest rate goes up, the cost of borrowing money increases. All sorts of loans — including mortgages and corporate debt — become expensive. There’s an argument to be made that there’s an inverse relationship between the stock market the interest rates. When the rates are low, the stock market goes higher. When interest rates are pushed up, the stock market declines.
This is partly why the Federal Reserve has been extremely conservative in increasing the interest rate from its historic lows. A modest increase in 2015 from the zero-.25 percent range to the .25-.5 percent range was the first time the Federal Reserve increased rates in almost a decade. Since then, the Federal Reserve has held off any further rate increases.
Even with a strong report, however, there’s no guarantee that the Fed would have taken action.
It’s easy to take a look at the 4.9 percent unemployment rate and assume the economy is on the right track. After all, that’s a marked improvement over the 6.1 percent from August 2014 and a modestly lower number than August 2015’s 5.1 percent. While the improved job figures are definitely good to see, the monthly jobs report shows that wage growth is slowing down.
While those are definitely welcome numbers, the Department of Labor’s August 2016 highlights a broad problem affecting workers across the U.S — slow growth in wages. The average hourly earnings rose just three cents in the report. Wages are up by 2.7 percent on the year, yet wages pale in comparison to the increases in the pre-financial crisis years.
The improvement in wages have been slow and steady, yet perhaps too sluggish for the average worker. Low wages mean less disposable income, and that means companies experience less growth than they would if customers were flush with cash.
If the Federal Reserve is to raise interest rates, both job growth and wage increases need to show steadier improvement. Until then, the markets will be surrounded with uncertainty.