Research & Advice

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Get Ready for the Rate Cuts

September 7, 2007 data as reported by Ned Davis Research

Job growth stopped in August for the first time in four years…Nonfarm payrolls actually shed 4,000 jobs in August. Economists expected a rise of 112,000, resulting in the biggest overestimation by economists in over three years. Additionally, the prior two months were revised down by a large 81,000, showing a more pronounced slowdown in job creation before the August financial turmoil. The unemployment rate remained at 4.6%, matching expectations. Average hourly earnings also matched the consensus, rising 0.3%. In order to reduce the risks to the economy and help stabilize growth, the Fed will lower the funds rate by 25 basis points (although 50 basis points is now a possibility) on September 18 and retain an easing bias, which likely will lead to another rate cut at the end of October.

Here are the payroll details:

  • Pulled down by a loss of 28,000 government jobs, services added only 60,000 jobs, the fewest since October 2005.  Seasonal hiring for local education was less than usual resulting in a 32,000 drop in that category.  The 80,000 drop in government jobs over the past two months is not likely to be repeated.
  • The private sector added just 24,000 jobs, a little less than the 38,000 forecasted increase from ADP.  The 64,000 drop in goods-producing jobs mostly offset the 88,000 increase in private service-producing positions.  Widespread manufacturing losses totaled 46,000 jobs, while constructions shed 22,000, all in the residential sector.  Job creation in education and health services remained strong, rising by 63,000.  Health care created 35,000 jobs.  Restaurants added 24,000.  Despite the weakness in mortgage lending, employment in financial services was flat.  Temporary help fell for the 7th consecutive month.
  • The 1-month diffusion index fell 6.1 points to 51.3, fairly reflecting sluggish private sector job growth.  Payroll growth has fallen to 1.2%, the slowest pace since May 2004.
  • Aggregate hours worked were unchanged.  Aggregate payrolls rose just 0.2%.  On a year-over-year basis, average hourly earnings remained at 3.9%, showing labor cost pressures have not accelerated despite a relatively low unemployment rate.  That won’t prevent the Fed from taking action to help the economy.

In the household survey, the labor force fell by 340,000, a 1.3 standard deviation event, mainly due to a drop in participation among teenagers.  As a result, the overall participation rate dropped to 65.8% from 66.1%, the biggest decline in over four years to its lowest level since March 2005.  The employment-population ratio fell to 62.8% from 63.0%, its weakest reading since December 2005.  On a trend basis, labor force growth has eased just 1% above a year ago, the slowest rate since March 2005.  Due to the sharp drop in participation, the unemployment rate slipped a notch to 4.64% from 4.65%.  The number of farm works fell 150,000 to a record low, also contributing to the 316,000 drop in the number of people counted as employed.

Notably, the number of persons employed part time for economic reasons rose by 203,000, all the result of people having hours cut back or being unable to find work because of slack work or deteriorating business conditions, and now accounts for 3.1% of total employment, the most since September 2005.  As a result, the broadest measure of the unemployment rate, U6, increased to 8.4%, its highest level in a year, despite the number of marginally attached workers falling to the fewest for an August in six years.