Fed Watch: Jobs Report Sends Mixed Signals

Friday’s jobs report indicated the unemployment rate dropped from7.6% to 7.4%, beating expectations of a 7.5% rate. Surprisingly, the labor participation rate – or the proportion of the population either actively employed or looking for a job – fell during that same period. Further contradicting this decline in the unemployment rate was the Labor Department’s report that U.S. employers added a mere 162,000 jobs in June, falling short of consensus estimates of 183,000. The result also fell short of the 189,000 jobs the economy has added per month, on average, over the last 12 months. At the same time, job gains in May and June were revised down by a cumulative 26,000.

It is important to note that the number of jobs added to the economy and the unemployment rate come from separate reports. The former comes from a business survey; the latter from a survey of U.S. households, which could help explain the apparent conflict in this week’s data.

All in all, while the July data was somewhat disappointing, it seems more likely that the Fed will base its actions on the cumulative improvement since it restarted asset purchases last September. Unemployment has fallen from 8.1% last August to 7.4% this July, and the six-month average monthly job gain is still 200,000. As a result, Fed tapering is still expected to begin in September. However, we think the pace of such activity will likely be modest.



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