Disappointing August jobs report could slow the Fed taper and increases twin fears for the economy

Published Fri, Sep 3 202110:18 AM EDTUpdated Fri, Sep 3 202111:19 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The surprise slowdown in the pace of job creation in August signals the Federal Reserve may be less likely to move toward tapering its bond program in September, as it waits to see whether it is a temporary reaction to the summer's Covid outbreak or a deeper problem for the economy. The economy added just 235,000 in August, and the unemployment rate fell to 5.2% from 5.4%. Economists had projected that 720,000 jobs were created in August, according to Dow Jones. Also a surprise was the 0.6% jump in average hourly wages, double the expected pace. Some pros had said a strong report, like that in July, would have pushed the Fed toward a September announcement that it would start slowing its $120 billion a month bond purchases. July's payrolls total was revised higher to 1.05 million up from the original estimate of 943,000. "Even with the upward revisions, this is a gut-wrenching number, and delta's imprint is all over it," said Diane Swonk, chief economist at Grant Thornton. Economists had expected big gains in leisure and hospitality and education, but those did not materialize. "It's important to understand that we cannot have the demand sustained if we cannot contain the virus." The report highlights twin worries about the economy — a potential slowing at the same time inflation is getting hotter. Strategists said the August report could put the Fed on a slower track to move away from its easy policy than some market pros had expected. The market has been divided. Some strategists and economists expected an announcement from the Fed in September if the jobs picture was strong, while others expected an announcement in November or December. "It makes September 22 look a lot less likely," said Michael Schumacher, director rates at Wells Fargo. Stocks weakened on the report, while Treasury yields rose. He said the 10-year yield's move to 1.33%, up from 1.29% before the announcement, was a reaction to concerns about inflation. "There was a big increase in wages. It makes me wonder again whether this big swing in inflation is temporary," Schumacher said. On an annual basis, average hourly wages gained 4.3%. "Wage inflation is especially tough because it tends to be sticky." Strategists said August's employment numbers are often volatile and subject to revision, but this report was clearly impacted by Covid. "The biggest culprit was leisure and hospitality, which was flat in August after being 415,000 in July," said Schumacher. Mobility data has showed a slowdown in hot spots, and credit card activity has showed lower spending. As for the Fed, expectations for a November announcement had increased after Fed Chairman Jerome Powell said last week that he would like to see more progress on the jobs front. "Powell keeps talking about the jobs deficit pre-Covid. It's going to take time to chip away at that," Schumacher said. Nonfarm employment has risen by 17 million since April 2020 but is still down by 5.3 million jobs from the pre-pandemic level in February 2020. Private education increased by 40,000 jobs but state government education positions fell by 21,000 and local government education decreased by 6,000. The weakness follows big gains in June and July. The taper would be the first step toward reversing the Fed's easy policies put in place to battle the pandemic. Swonk said Powell has taken pains to make clear that the Fed's actions on the bond program would not signal an automatic move toward higher interest rates. The Fed is expected to take months to wind down the bond program once it starts. "From the Fed's perspective, they are really trying to decouple the idea of tapering from the idea of liftoff," or interest rate hikes, Swonk said. Therefore, the Fed is still likely to talk about the perimeters it would look for to start the taper, and stress that it was a program to help financial markets during the peak of the crisis. "What they already said is they need a couple of good months like July and June, and we didn't get it. This does slow it down a bit, but I do think they'll do something by year-end. This pushed it out a bit," Swonk said.

A sign advertising job openings is seen outside of a Starbucks in New York, May 26, 2021.

Andrew Kelly | Reuters