111,000 Jobs in September: Good enough for Fed to hold?

Good, not great. That's how I'd sum up today's employment report.

Employment rose in September, and the unemployment rate was essentially unchanged at 4.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Nonfarm payroll employment rose by 110,000 following increases of 93,000 in July and 89,000 in August (as revised). In September, health care, food services, and professional and technical services continued to add jobs, while employment trended down in manufacturing and construction. Average hourly earnings rose by 7 cents, or 0.4 percent.

The unemployment rate actually climbed just a bit, but a 0.1% move in either direction is within the statistical margin. That said, it was 4.5% this summer, so that gives fuel to the argument that things have marginally deteriorated. Spencer was correct with his hypothesis that August numbers would be revised upward due to a fluke of timing in the data collection period. The last 3 months have clocked in at just under 100,000 per month on average.

That's no great shakes, but it's not recessionary yet. Opinions differ as to just how much job growth is needed per month to keep up with population growth. For a long time 150,000 was the number tossed around. Demographic changes have likely lowered that number, though probably not under 100,000. In casual conversation these days, I settle on around 125,000 and admit to uncertainty. In that respect, the recent numbers are good, but not great.

Given the current uncertainty about whether we are on the cusp of a recession, however, the numbers take on greater importance. Everyone wants to know whether this will move the Fed. No doubt this is a data point in favor of a less aggressive move, or perhaps no move at all. The Chicago Board of Trade binary options indicate that the probability of some kind of cut in October dropped from 56% to 41%. It's still pretty much a coin toss, but the bias of the coin shifted just a tad.

Then there was this speech today by Don Kohn. (h/t Calculated Risk) Here are a couple of salient points.

Many people had expected the Federal Reserve to follow a gradual path of rate reductions in response to financial market developments--say, 25 basis points in September and another 25 basis points in October. Such a path would be in keeping with how we have often approached our policy choices, as it has the advantage of allowing us to calibrate our policy as we see how the economic situation is evolving and responding to earlier policy moves. However, given the circumstances at the time of the September FOMC meeting, there were strong arguments in favor of the larger action of a 50 basis point decrease in the federal funds rate. For one thing, it seemed that a decrease of that size could well be necessary to promote moderate growth. We had been holding the federal funds rate at 5-1/4 percent, well above the expected rate of inflation, in part to compensate for what had been very narrow yield spreads and readily available credit. We did not know how quickly markets would recover, the extent to which credit terms and standards would be tightened, or precisely how households and businesses would respond to recent or forthcoming financial developments. But, pending further evidence, a 50 basis point easing was not an unreasonable first approximation of what might be required to keep the economy on a sustainable growth path.

In addition, I thought that economic performance would be better served by the Federal Reserve taking its chances on responding too much, or too rapidly, to the turmoil in financial markets rather than acting too little, or too slowly. Sluggish or inadequate easing risked a weaker real economy that might cause lenders to pull back even more, leading to a deteriorating situation that could prove difficult to reverse. With the news on inflation relatively favorable of late and with inflation expectations seemingly well anchored, I believed that we would be able to offset the cut in the federal funds rate--if it turned out to be larger than needed--in time to preserve price stability.

And what will become the headline for this speech...

We will need to be nimble in adjusting policy to promote growth and price stability.

That would seem to suggest a Fed that was ready to move decisively with an opening gambit of 50 basis points just in case all of it was needed. That doesn't mean that the next move will be that aggressive. Furthermore, they're ready to take it back if prices jump.

But right now inflation still seems contained. The CPI is up just 2% in the last year (that's the headline number, not core) and the most recent reading was actually a slight decrease. If the economy softens, it will keep the pressure off. But if not... then it pays to be nimble.

There is still a very large amount of sentiment for continued rate cuts, and today's employment number, while not entirely dismal, will probably not diminish that sentiment among those who hold most tightly to it. For those on the margin, it may be enough to urge them to wait. If the rest of the month's data turns out to be consistent with the labor data, then they may put off a cut until December. It seems to me right now that a further cut in October is speculative--an insurance policy in case the housing problems spill over into the broader economy. The more insurance they take, the greater the likelihood that they find themselves needing to reverse course in 2008.

For now, for my money, it's still a tossup.

In related action, PGL discusses the labor force participation rate and employment/population ratio. He mentions our discussion from way back. I'll say it again. The long run trends are for lower LFPR and E/P as the baby boomers retire. But that's not what we're seeing here. I raised the point then and repeat it now as a caution to not necessarily expect the "optimal" ratios today (and in years to come) to equal those of the late '90s. However, the declines over the last year (like the increases in the previous year) are of a more high frequency nature. PGL is correct to raise the issue. The decline in these numbers since December is indicative of some potential problems below the surface that deserve more investigation. More on that later.