Lower-than-expected unemployment rate could impact stimulus
A big decline in the unemployment rate in August is "worth celebrating," but could take the pressure off lawmakers to help the economy, according to economists.
The unemployment rate fell to 8.4% from 10.2% the month prior, while nonfarm payrolls climbed by 1.4 million, according to the Labor Department.
Economists polled by IFR Markets expected the unemployment rate to drop to 9.8% and projected 1.4 million adds to nonfarm payroll.
“Considering the Fed’s Summary of Economic Projections had the employment rate in the low nine range by end of the year, the fact that it is already in the eights, is progress worth celebrating,” said Mark Hamrick, senior economic analyst for Bankrate. “But we still have a large mountain to climb in terms of payrolls, since we lost 22 million jobs at the onset and have recovered 10.6 million; that means we still have 11.5 million to go.”
The improvement "slightly complicates the Fed’s ultra-accommodative stance" and suggests the labor market rebound is now “intact,” according to Ed Moya, senior market analyst at OANDA , "Washington won’t be pressured into doing much more for the time being," he added.
“The Fed was expected to become more accommodative over the next few months, but if the labor recovery continues, we might see slightly less stimulus down the road,” Moya said. “The Fed’s actions mean a steeper curve is likely as they try to spur inflation and let the labor market run hot. The next round of stimulus along with the Fed’s new inflation strategy will help drive higher yields for lengthier maturities.”
Hamrick added, “It is hard to predict what members of Congress will do," but they should "find some area of comprise, since many Americans will have their money run out eventually.”
Marvin Loh, senior global macro strategist at State Street, said the jobs report continued to “show progress” even in a month when virus cases accelerated and enhanced unemployment benefits ended.
“Weekly claims data continues to show over 25 million people collecting unemployment benefits, with a subset of that group likely to exhaust all benefits in certain states,” he said. “The risk of a stall in further employment gains remains an overhang with the uncertainty in the timing of the next stimulus package rising as it becomes an election year casualty.”
The numbers, Moya suggested, were boosted by filling jobs of people on “temporary layoff,” with that number "decreasing by 3.1 million in August to 6.2 million, which is much better than the series high of 18.1 million in April."
He added, “Americans having permanent job losses increased by about half a million to 3.4 million, the highest level since 2013. This was a good employment report as more people came into the workforce and were able to find jobs, but a lot more work needs to be done to foster the labor market rebound.”
The average work week nudged up to 34.6 hours in August from 34.5 a month earlier. Economists anticipated a 34.5 hour work week.
Average hourly earnings increased by 11 cents to $29.47.
This month’s employment report also counted the hiring of census workers.
“While there is a bit of a slowdown in hiring once you strip out the census numbers, this is still a positive surprise,” said Brian Coulton, chief economist at Fitch Ratings. “So far, the labor market seems to be shrugging off any worries about the fiscal cliff and the virus numbers. We still see economic growth slowing as we get into the fourth quarter — as the boost to activity from re-opening fades — but the summer rebound has been stronger than we initially thought.“
But it wasn’t all good news, according to John Leer, economist at data intelligence company Morning Consult. “The drop in the unemployment rate to below 10% for the first time since March indicates a gradual improvement since July, but August data still shows that Americans who remain unemployed are increasingly less likely to find new work,” he said.
“In August, unemployed workers were also increasingly unable to make ends meet, with 50% unable to pay for their basic expenses using just their unemployment insurance benefits — up from 27% in July," he added. "As the economy gradually recovers from the pandemic, unemployed Americans remain at high risk of experiencing financial hardship, and additional deterioration in their finances has the potential to jeopardize the ongoing gradual economic recovery for the country.”
The duration of unemployment acts as an “additional headwind” to a robust jobs recovery, Leer said, even as the number of unemployed workers decreases. “History has shown that it becomes increasingly difficult for unemployed workers to find jobs the longer they remain unemployed, either because they lose the skills they need to compete, or due to the stigma of long-term unemployment.