WHEN the Federal Reserve began open-ended bond buying with newly printed money last fall, it hoped to generate forward momentum in the labour market. And as recently as August it seemed to have succeeded. But the recent data suggest a frustrating reversal of that momentum, with no clear explanation. Non-farm payroll employment rose just 148,000 in September from August, well below Wall Street's consensus expectation of 180,000. This was the second weak reading in a row, and vindicates the Fed's decision not to dial back its $85 billion of bond-buyding, dubbed quantitative easing or QE, last month.
Revisions to prior months' payroll gains were roughly offsetting. A big chunk of September's gains were in state and local employment. This would normally be a source of celebration since state and local austerity has been such a powerful headwind for the economy. But the pickup in government hiring has been more than offset by a slowdown in private job creation, to a monthly average of 129,000 in the last three months from 232,000 last December. Weak job gains were matched by equally tepid wage gains of just 0.1%.
The only positive, if it could be called that, is the decline in the unemployment rate to 7.2%, a near-five year low, from 7.3%. Before rounding, the drop was barely noticeable. Meanwhile, the labour force participation rate held at a multi-decade low of 63.2%. Unrounded, it actually slipped further. All of the drop in unmployment from 7.8% last December has been due to lower participation, which means fewer unemployed are recorded as looking for work, rather than higher employment. The "non-employment" rate, which is simply everyone not working as a share of the civilian, non-institutional population, has remained at 41.4%, as the nearby chart shows.
This is not primarily due to a weak economy; the number of people not in the labour force who want a job has actually fallen 9% since December, to 6.2m. The people leaving the labour force don't want to work.
Exactly why the labour market has rolled over is something of a mystery. Other, less comprehensive information is more upbeat: unemployment insurance claims through September had fallen steadily, though they have been heavily distorted since by technical problems. Surveys of hiring and confidence were also generally positive, although they took a hit during the government shutdown. The rise in mortgage rates since the spring has taken a bite out of housing. But construction employment actually rose a relatively healthy 20,000 in September. Finance did, however, lose 2,000 jobs, which was probably related to layoffs of mortgage bankers. Federal spending cuts related to the sequster may be to blame.
Even before today's report the Fed was not inclined to dial back its $85 billion a month of bond purchases, financed by printing money, when it meets again on October 29th and 30th. It could still begin to taper at its December 17-18 meeting, even if the labour market still appears soft, provided officials are relatively confident the outlook, as reflected in other data, is for improvement. But it will be hard to say by December whether that improvement has happened. The government shutdown directly reduced employment for October, and an index compiled by Gallup suggests private job creation also slowed that month. A weekly index developed by the White House Council of Economic Advisers suggest private job creation dropped by 120,000 in the first two weeks of October. Moreover, the shutdown interrupted the Bureau of Labor Statistics' data collection for the report. The household survey, which yields the unemployment and labour force data, started a week later than usual. The shutdown did not affect the collection of the data reported today although it delayed the release by 18 days.
At least one broker today said the data would keep the Fed as on hold." That's not accurate: as long as QE remains a positive number, the Fed is not on hold: its balance sheet is still expanding and monetary policy is becoming more, not less, stimulative. This distinction may be trivial to the public but it's important to the Fed, where officials agree that the pace of balance sheet expansion has to slow and only disagree on when and how quickly. Charlie Evans, president of the Chicago Fed, indicated only $500 billion more in bond purchases beyond September will be needed, which would imply an end in March at the current pace, or somewhat later if tapering begins soon. Jay Powell, a Fed governor, emphasized recentlythat "what matters is the overall stance of policy, not the pace of asset purchases." In other words, the date when tapering begins is less important than how large the balance sheet ends up. The later tapering begins the more rapid it will proceed to achieve a given target for the balance sheet.
Ben Bernanke could yet make the taper his last act as chairman in January, but the odds now favor it being Janet Yellen's first act as chairman, in March. She will not do so lightly; she is, if anything, more intent than Mr Bernanke on applying as much monetary stimulus as possible to get employment up faster. But within the Fed there is a growing desire to shift the burden of stimulus to the short-term interest rate and away from quantitative easing. Still, the decision to taper will not be an easy one. Fed officials have often been muddled in explaining the criteria for beginning and ending QE, but one thing is clear: they had hoped the labour market would be gaining, not losing, momentum by now. The exit seems no clearer than when this round of QE started a year ago.
The Economist_America's jobs report_ Still sluggish.pdf