Hurry up and wait. Anyone who has spent time in the military is more than familiar with that expression. Now, investors, economists and consumers alike are feeling the same way about the next move by the Federal Reserve.
Friday’s employment report showed U.S. payrolls rose by just 96,000 in August, well below expectations. To make matters even worse, the Department of Labor revised the June and July reports to show hiring was actually 41,000 less than had been previously announced. The unemployment rate actually fell in August to 8.1 percent as the labor force shrank by 368,000 workers.
“The large drop in the labor force in August pulled down the overall labor force participation rate to 63.5 percent, representing the lowest percentage of working age adults participating in the labor force since the late 1970s,” said Robert Dye, chief economist at Comerica Bank.
While companies are hesitant to increase hiring ahead of the November elections and pending fiscal cliff at the end of the year, they also seem to have reached a point where they are no longer cutting payrolls.
A report by outplacement consulting firm Challenger, Gray & Christmas found that announced layoff plans by employers fell in August to the lowest level in 20 months. Overall, planned cuts totaled 32,239, down 12.5 percent from the previous month.
“Job cuts slowed significantly over the summer, but it is too early to determine whether this is a trend," said John Challenger, of Challenger, Gray & Christmas. "There have been other signs of economic improvement, including an uptick in home prices and strong automobile sales. However, there seem to be just as many reports showing continued trouble, such as three months of contraction in manufacturing.”
With the August employment report, the ball now shifts squarely into the camp of the Federal Reserve. Chairman Ben Bernanke will lead a two-day meeting of the Federal Open Market Committee on Wednesday and Thursday to review the economic news and decide if immediate action is necessary to avoid a new slowdown.
“It now appears more likely than not that the Federal Reserve will initiate additional monetary policy measures Thursday," Dye said. "These could include another round of quantitative easing and additional forward guidance about the fed funds rate.”
However, others suggest the Fed and Bernanke may want to wait a bit longer before using the few tools they have available just in case things get even worse.
“While the Fed has made it clear they are ready to act if growth doesn’t begin to pick up and unemployment come down, we are in the camp that believe they refrain from action in the September meeting, choosing to save what few remaining bullets they may have for later,” said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research. “The most basic thing Washington could do is provide some certainty as to the tax structure. American businesses have an amazing ability to succeed in myriad environments, but they have to know what the rules are before they can even suit up.”
Put another way, Lynn Reaser, chief economist at Point Loma Nazarene University’s Fermanian Business & Economic Institute, said, “The economy is not stalling out, but it appears to still be in low gear. Businesses are just too uncertain to be in a hiring mood.”
The Fed announcement will be released on Thursday at 11:15 a.m. Pacific time.
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