ECON SWEET & SOUR
Weak GDP + July’s 255K new jobs = Fed in bind
FOR the second straight month, the US economy created a large number of jobs, the Labor Department reported on Friday.
The sudden surge in job growth in June and July — coming even as the nation’s gross domestic product has significantly weakened — creates a tricky situation for the Federal Reserve, Donald
Trump, the Republican Party and business leaders who need to decide whether the employment report or the GDP is giving a true picture of the economy.
Labor said 255,000 jobs were created in July and that the unemployment rate stayed at 4.9 percent.
At the same time, hourly wages crept up 8 cents and are now 2.6 percent higher than in December.
The labor force participation rate, which can gauge how discouraged idled workers are, ticked up to 62.8 percent from 62.7.
Also, job growth in June was revised up to 292,000 from 287,000, and Labor also increased May’s growth to 24,000 from 11,000.
But before you get too excited about the 255,000 new jobs, I will tell you the impressive figure includes seasonal adjustment additions. Not including the additions, the US actually lost jobs last month — as it always does in July.
The raw data show that there were 144.185 million jobs in the US during July. That was down from 145.215 million in June — meaning the US lost 1.03 million jobs last month.
But Labor stopped using raw numbers a long time ago. Seasonal adjustments are now normal.
Job growth in July came mostly from professional and business services, leisure and hospitality, technical services, health care and financial activities.
Some of this made little sense: Wall Street is cutting back, so how is the financial industry creating jobs? Res- taurants are hurting, so how is there good job growth in leisure and hospitality?
There’s another reason to be cautious about the June and July jobs numbers: They fly in the face of the GDP report.
GDP, the Commerce Dept. said, showed growth of only 1.2 percent in the second quarter. That was well below expectations and was mainly caused by a pullback in business spending.
So how can businesses be hiring people, as the employ- ment report says they are, when the GDP indicates they are cutting back on spending?
Worse, the GDP in the first quarter grew at an annual rate of only 0.8 percent rate, after being downgraded by Commerce.
The Atlanta Federal Reserve — which tracks the GDP daily but missed big on the second quarter — is optimistic on the third quarter that just began, predicting annualized growth of 3.8 percent.
If you are confused about the disconnect between the weak GDP and the relatively OK jobs report, just think about how crazy the folks at the Federal Reserve must be feeling.
The Fed has been trying for years to normalize interest rates — and Chair Janet Yellen continues to say she wants to raise rates.
But the only time the Fed had the nerve to do so was last December — and that was quickly followed by a tantrum by the financial markets. That tantrum and the suddenly weakening economy caused the Fed to put further increases on hold.
The Fed’s policy-making committee meets again on Sept. 20-21 after one more jobs report. Another 200,000plus report could give Yellen the cover needed to raise rates on Sept. 21.
But a weak August jobs report — together with a weaker revised GDP report — could restrain a rate hike.
The Fed, as it has been for years, has put itself in a corner because of indecision.
As if that wasn’t enough, the Fed will also have to wrestle with the potential fallout of a September hike on the stock market.
Remember, in December the markets started a sell-off in the wake of a hike.
Yellen & Co. certainly don’t want to mess with — and potentially sink — the markets just 48 days before Election Day. That would certainly benefit Trump.
As we get closer to Sept. 21, you might want to have a bottle of Scotch on the table next to your easy chair. Take my word for it — you’re going to need it before this is over.