August Was an Aberration, but Slack Remains

In response to last week’s solid September jobs report, the LA Times reported, “August was an aberration.” The U.S. economy added 248,000 jobs during the month of September, driven by strong gains in retail employment, followed by healthcare and business services. Excluding August, the U.S. labor market has added more than 200,000 jobs per month going back to February, the longest streak since 1997. The September jobs report revised August job creation up to 180,000 jobs, reversing what economists called an anomaly caused by a New England grocery store strike. Consistent job growth is a welcome sign, but the labor market “trio” – as one economist described three indicators of labor market strength: job creation, wage growth and long-term unemployed – are not improving together. Job creation may be on firm footing, but wages grew by only 2% for the year through September, below both expectations and August’s growth of 2.1%. Although the unemployment rate dropped below 6.0% for the first time since 2008 (to 5.9%), this was due to a further decline in the labor force participation rate, echoed by  little change in long-term unemployment. Low wage growth tells us too many people are still looking for jobs, and unchanged long-term unemployment reinforces the negative sentiment. We remain optimistic about U.S. economic growth, but believe the Federal Reserve is focusing on the labor market with enhanced  scrutiny while inflation remains low. We do not expect the Federal Open Market Committee to increase interest rates until the middle of 2015, or possibly much later, without seeing a noticeable improvement in wages and long-term unemployment.

Sources: BLS, L.A. Times, Bloomberg