The U.S. job market is turning ugly, exposing the folly of the Fed's plan to tighten monetary policy and Congress' hellbent march toward another destructive budget battle.
Policy makers should be doing more to boost an economy that remains stubbornly mediocre. Instead, leaders in Washington are getting ready to make things worse.
Employers added 169,000 jobs to non-farm payrolls in August, the Bureau of Labor Statistics said on Friday, while the unemployment rate dropped to 7.3 percent, the lowest since December 2008.
On the surface, these numbers didn't seem too bad: Economists, on average, had expected to see 180,000 new jobs and the unemployment rate holding steady at 7.4 percent.
But the drop in unemployment was due largely to people giving up looking for work, which takes them out of the official labor force, so they're no longer counted as unemployed. The labor-force participation rate, the percentage of working-age people either working or looking for work, dropped to 63.2 percent from 63.4 percent in July, the lowest rate since 1978.
Meanwhile, the BLS revised June and July payroll numbers significantly lower, erasing 74,000 jobs from the books. Based on the new data, the economy has added just 148,000 jobs per month in the past three months, down from a pace of 207,000 jobs per month in the first three months of the year. At the current rate, job growth is just barely enough to keep up with population growth and keep unemployment from rising.
"Not a great report at all," independent economist Robert Brusca wrote in an emailed note.
The economy has added 6.8 million jobs since the labor market bottomed in February 2010. But it is still about 1.9 million jobs shy of its peak in January 2008, in what has been the slowest job-market recovery since World War II. The Economic Policy Institute, a left-leaning think tank, estimates that the economy has about 8.3 million jobs fewer than it should, given the size of the population. At the current pace of job growth, that gap won't be closed until 2021, the EPI estimates.
"The jobs report released today underscores the fact that we still need all macroeconomic guns blazing to boost the economy," wrote EPI economist Heidi Shierholz.
Friday's report comes just days ahead of a Federal Reserve policy meeting, at which Ben Bernanke & Co. have announced that they plan to start "tapering" an unusual stimulus program. The Fed has been buying $85 billion per month in bonds for the past several months to help keep interest rates low and boost the economy. But in May, Bernanke and other Fed officials started warning the market they intended to slow down the pace of their bond buying.
Financial markets, particularly the bond market, have been shaken by the Fed's plan. The interest rate on the 10-year Treasury note, a benchmark for borrowing throughout the economy, has nearly doubled, to 3 percent on Thursday from 1.6 percent in the spring. That has driven mortgage rates higher and cooled a housing market that had been one of the bright spots of the economy.
"The economy's really not strong enough to handle 3-percent-plus interest rates," said Steven Ricchiuto, Chief Economist at Mizuho Securities USA.
The relatively weak August jobs report might inspire the Fed to be a little more cautious about tightening policy, so financial markets had a seemingly perverse reaction to downbeat economic data: Stock and bond prices both rose on Friday morning, in hopes the Fed would have mercy.
Congress may not be as kind: A Congressional resolution to bankroll government spending expires at the end of September, and the Treasury Department has warned that it will hit the "debt ceiling" in mid-October, meaning it can no longer pay its old debts without Congressional approval. Republican lawmakers have vowed they won't raise the debt ceiling or approve new funding for the government without deep cuts in government spending.
Similar fights in the past have led to the U.S. credit rating being downgraded in August 2011 and the destructive fiscal-cliff fight of last winter. The "solution" to the fiscal-cliff battle included a payroll-tax increase and the draconian budget cuts of "sequestration," both of which have slowed down the economy and curbed job growth.
As Friday's job report showed, more such austerity is the last thing this economy needs.
"All told, it's just a fantastic time for Congress to start monkeying around with the debt limit, government shutdowns, and sequestration," University of Michigan economist Justin Wolfers tweeted.