Unemployment and Non-Farm Payrolls

Non-farmpayrolls grew at a lower than expected rate and the unemployment rate declined slightly during August as the final set of employment data before the Federal Reserve’s September meeting was released. 169k net jobs were created during the month, slightly lower than economist’s expectations, which called for 180k new jobs. The July non-farm payrolls figure was revised down from 162k to 104k and the two month revision was minus 74k. The unemployment rate fell from 7.4% to 7.3% during the month, due in large part to a decline in the labor participation rate, which measures the percentage of working age people in the labor force. The number fell from 63.4% to 63.2%, the lowest level since August 1978. While a decline in the participation rate can indicate an exodus of discouraged would-be workers from the labor force,  demographic factors such as an aging baby-boomer generation may also contribute. In a recent speech, San Francisco Fed President John Williams’ cited research that suggested structural factors have accounted for more of a decline in the participation rate over recent years. A declining participation rate can have multiple implications, the most significant being that the slowly declining unemployment rate is somewhat overstating the improvement in the economy. As job prospects improve however, discouraged workers may rejoin the workforce, increasing the participation rate and normalizing the unemployment rate. While the unemployment rate continues to be the guidepost for the Federal Reserve to slow their asset purchases and ultimately change their overnight policy rate, we use caution when utilizing this number as a gauge for economic growth. For SNW Asset Management, the underlying drivers of this figure continue to point to an economy growing at a modest pace with little wage or inflation pressure.