The prospect of an interest rate rise in the US has receded after news that the world’s largest economy suffered a lull in job creation last month.
There were 151,000 jobs added to the US economy in August, below economists’ forecasts for 180,000 and a marked slowdown after two bumper months of growth. Figures from the Department of Labor also showed wage growth slowed and the unemployment rate remained steady at 4.9%, defying expectations for it to edge down in August.
The US Federal Reserve has hinted at a rate rise before the end of this year, with some economists saying ahead of the latest job figures that a move could come at central bank’s meeting later this month. But the Fed chair, Janet Yellen, has also said she and fellow policymakers would watch the economic data closely. As a result, analysts said the weaker jobs number would probably keep interest rates on hold for now.
“The data-dependent Fed will most likely see the payroll numbers as taking pressure off any immediate need to hike interest rates, significantly reducing the scope for further policy action in September,” said Chris Williamson, chief economist at IHS Markit.
Investor expectations that the Fed will now hold off raising rates in September buoyed stock markets in the US and Europe. On Wall Street, the Dow Jones industrial average rose sharply after the jobs news but ended the day up 72 points (0.39%). The FTSE 100 of big UK-listed stocks ended the day up 2.2% at 6894.60, lifted by brighter news on Britain’s economy this week.
The August slowdown in US jobs creation follows stronger performances in June and July when a combined 546,000 jobs were added. That apparent strength had fanned market expectations of another move from the Fed to get interest rates back to more normal levels after the financial crisis ushered in years of record low borrowing costs.
The Fed last raised borrowing costs in December 2015, the first such move in almost a decade, bringing the interest rate range to 0.25%-0.5%. Since then it has held off any further moves amid low inflation and mixed news on the US economy. Policymakers have also highlighted worries about the global outlook and the possible repercussions of the UK vote to leave the EU.
A report this week suggesting US manufacturing shrank in August added to the mood of caution around the economic outlook but many economists still see a rate rise in December as likely.
The US central bank is also closely watching wage growth, which slowed in August, according to the latest figures. Average hourly earnings were up 0.1% in August after a 0.3% rise in July.
Economists at Fathom Consulting said the “lukewarm” payrolls report left rate-setters at the Federal Open Market Committee (FOMC) with a dilemma.
“In order to be ‘reasonably confident’ that inflation will return to target, average hourly earnings will need to rise by more than 0.1% each month, as they did between July and August,” they wrote in a research note.
At the same time, the slowdown in jobs creation at this point in the recovery was widely expected and the Fed will not be overly concerned about the August figure, economists said.
The Fathom note continued: “Although just 151,000 net payrolls were added in August, less than expected, the underlying rate of job creation is still well above the level required for the labour market to tighten. We stick to our view that the FOMC will increase rates once this year – though December now looks most likely – and at least twice in 2017.”
The detail of the jobs report showed food services was the biggest growth area, adding 34,000 new jobs.
The report once again highlighted the racial disparity in the jobs market. Unemployment for African Americans stood at 8.1%, with white people at 4.4%.
The US labor force participation rate, the percentage of the US population in the workforce or actively seeking a job, remained unchanged at 62.8%.
Elise Gould, senior economist at the Economic Policy Institute, said the latest payrolls report meant the Fed should hold fire.
“August’s payroll number is weak tea – we need to have stronger job growth for a more sustained period before we can say we’re at full employment,” she said.
“This is the last jobs report before the Federal Reserve meets and potentially raises rates. They should hold steady, and let the economy to steep a little longer, so the recovery can reach the most distressed communities.”
The FOMC will next meet on 20 and 21 September. However, not everyone believes it should wait to raise rates.
“I think they should hike in September,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi expected the US economy to add 150,000 jobs in September. “I think they’re running the risk that the longer they wait to normalise rates, the greater the odds that the economy overheats.”
