New Employment And Inflation Data Likely To Delay Interest Rate Hike
Employment data released Friday was just okay and likely to delay a long-anticipated hike in interest rates. Unemployment held steady at 4.9% in August, according to the U.S. Bureau of Labor Statistics (BLS). That's not quite as low as was reached in the last two economic expansions, but this expansion is still in progress. The BLS also said 151,000 new non-farm payroll jobs were created in August — a healthy gain but nothing spectacular.
The 4.9% unemployment rate, officially known as the U-3 index of unemployment, gets all the headlines but the government's U-6 index of unemployment has more influence over the Federal Reserve's monetary policy.
The U-6 unemployment index includes people who are not in the labor force but are available for work, and those who have looked for a job in the previous 12 months but had not searched for work in the four weeks before the survey. It includes "discouraged workers" not looking for work because they believed no jobs were available, or that there were no jobs available for which they would qualify.
The downward slope of both indexes has flattened, and both must head considerably lower before the Fed will satisfy its mandate. That makes any Fed rate hikes likely to come in small quarter-point increments over a long period.
The inflation rate as measured by the Personal Consumption Expenditure index, or PCE deflator, was also released this past week. At 0.8%, it remained below the Fed's target rate of 2%. The Core PCE deflator, which is influential in determining Fed interest rate policy, came in at 1.4% — higher than 0.8%, but well below the Fed's target of 2%.
The BLS employment data for August indicates that the labor force participation rate, the red line in this chart, has experienced an important cyclical trend: people who left the labor force because they did not think any jobs were available for them are re-entering the labor force. This explains why the unemployment rate, at 4.9%, has flattened and not continued its downward path, despite healthy job gains. This is a positive development signifying a cyclical stabilization in the labor force participation rate.
The Standard & Poor's 500 index, a gauge of the value of America's largest publicly-held companies, rose about one-half of 1% higher for the week at 2,179.98. That's very close to its all-time high.
Stocks have marched higher for years and are susceptible to a correction at any time. However, Fed policy is likely to remain accommodative and low interest rates make stocks relatively attractive. In addition, none of the precursors to a recession or economic reversal are evident, and the slow-growth expansion — one of the longest of the century — remains intact.
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