US payroll report: Not a 'tapering game-changer' – BCA Research
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US payrolls increased by 169,000 in August, although downward revisions to previous months brings the three-month moving average down to a disappointing 148,000 per month. Still, BCA Research doubts this data will meaningfully sway the Fed’s thinking.
The payroll numbers are slightly disappointing, but other forward looking data have been much more upbeat (e.g. ISM manufacturing and non-manufacturing surveys). On balance, we think the overall picture painted by recent data points to an improving economy: the payroll report does not provide a sufficient hurdle to modest Fed tapering.
Our base case remains that the Fed will announce modest tapering at its next meeting in September, but will combine this decision with a dovish tweak to its forward guidance. One favored possibility is to lower the unemployment rate threshold.
The August drop in the unemployment rate to 7.3% was due to a decline in the labor force (the denominator) rather than a strong increase in hiring. Meanwhile, the labor force participation rate fell to 63.2%, a new post-recession low. This once again underscores that the unemployment rate misses a lot of under-employment, which has been particularly high this cycle.
At this point in the recovery, labor force participation typically rises as improved job prospects lure previously discouraged workers back into the job market. This has not happened, as evidenced by the still very high rate of U-6 unemployment (which includes marginally attached and underemployed workers).
The bottom line is that our base case remains that the pace of U.S. recovery should gather momentum in the latter half of the year. Todays payroll data is unlikely to be a game-changer in the Feds decision to taper, but underscores the possibility of a lower unemployment rate threshold for rate hikes.