Fed Should Ignore Tomorrow’s August Unemployment Report

At the risk of sounding like a broken record, I want to continue and expand the discussion on whether or not the Federal Reserve Bank will raise the Fed Funds rate on September 21 at the close of its next policy meeting. I have some interesting new information to share today.

In last week’s Blog, I discussed the fact that two of the Fed’s top honchos (Vice-Chair Stanley Fischer and NY Fed President William Dudley) came out publicly in August with serious arguments for at least one Fed Funds rate hike this year, if not two – September 21 and December 14. Since then, a couple more Fed bank presidents have voiced similar views.

blog160901aFed Chair Janet Yellen’s speech last Friday in Jackson Hole made it clear that she is more open to a rate hike soon, IF the economic data remains on the firm side. Most Fedwatchers seem to think that tomorrow’s unemployment report for August will be the deciding factor in whether or not the Fed hikes on September 21.

The prevailing wisdom is that if tomorrow’s jobs report is strong, say 220,000 to 250,000 or more new jobs created in August, the Fed Open Market Committee (FOMC) will vote on September 21 to hike the Fed Funds rate range to 0.50%-0.75% from 0.25%-0.50% today.

On the other hand, if the new jobs number tomorrow is disappointing, say only 150,000 to 180,000, the FOMC likely would not vote to hike the Fed Funds rate and wait until the December 13-14 meeting to seriously consider an increase.

Here’s the new information I just discovered this week: The August jobs report is one of the least reliable of the year. Several unusual things happen in August that are hard for the Labor Department to measure accurately. Among them is the fact that large numbers of young people quit their summer jobs and head back to school in August, which can cause a potentially sharp decline in the labor force.

The Labor Department’s Bureau of Labor Statistics (BLS) has a very hard time “seasonally-adjusting” for this big swing, which has often wreaked havoc on the August jobs report. As a result, the initial August jobs number is almost always revised significantly in subsequent months.

What I learned this week is that from 2009 to 2014, the August jobs reports were revised upward by an average of 74,000 additional jobs. That’s big. Not every August report was revised up, however; the August 2015 report, for example, was revised down by 20,000 fewer new jobs.

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As you can see in the Bloomberg chart above, the monthly new jobs reports are very volatile, especially in recent months. In June and July, new jobs came in above pre-report expectations at 292,000 and 255,000 respectively. Yet in May, new jobs plunged to only 38,000 – a fraction of the pre-report consensus of 162,000.

My Point: The Fed Should Ignore Tomorrow’s Jobs Report

Given the clear unreliability of initial August unemployment reports, there is no reason the Fed should make a rate decision based on tomorrow’s report. While most Fedwatchers think the Fed will decide whether to hike rates at the September 20-21 FOMC meeting based on the strength or weakness of tomorrow’s report, I disagree since tomorrow’s report is so unreliable.

I should note that the Fed has hundreds of economists and analysts, many of whom know about the unreliability of the initial August jobs reports. You can bet that if I know about it, they know about it.

For the last few months, I have predicted that the FOMC won’t hike the Fed Funds rate until after the election. I stand by that prediction, especially in light of the information I have shared with you today.

Going into tomorrow’s unemployment report, here are the expectations. The consensus for the headline unemployment rate is for it to drop modestly from 4.9% in July to 4.8% in August. As for new jobs created in August, the Bloomberg survey of economists has a consensus of 175,000 net new jobs last month. The Yahoo survey found a consensus of 180,000 new jobs last month.

Both of those numbers are on the low side, as compared to what we saw for June and July. If accurate, this is further evidence that we won’t see a rate hike until at least December.

I rest my case. Let’s move on to another subject. I have a very interesting new topic in mind for next Tuesday’s Forecasts & Trends E-Letter that I bet you haven’t heard about. Newer readers can go to my sign up page to subscribe to my free weekly E-Letter if you haven’t already.

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