09/07/2012 03:18 pm ET Updated Nov 07, 2012

Lackluster Jobs Report Ups Pressure on Fed

Non-farm payrolls increased by just 96,000 in August, capping a five-month period of lackluster employment gains. Although the unemployment rate edged down to 8.1 percent from 8.3 percent, the latest jobs data largely confirms the impression of a labor market in relative stagnation. Growth in non-farm payrolls of 96,000 in August was only mildly above the average for the previous four months. Jobs growth had been much stronger around the turn of the year, with monthly employment gains averaging 225,000 between December 2011 and March 2012. Since then, however, the labor market has faltered. Average employment growth of 87,000 per month in April-August is not even fast enough to keep up with population growth. As a result, the unemployment rate has stabilized at 8.1-8.3 percent since the beginning of the year. The poor jobs situation is being exacerbated by a contradictory fiscal policy.

For some time now, the private sector has been creating jobs steadily, albeit at low levels. Yet overall employment gains have been held back by steady monthly job losses at all levels of government. The public sector has shed around 360,000 jobs since the beginning of 2011, of which a further 7,000 were lost in August. In terms of sectors that recorded gains, the strongest increases came in leisure and hospitality; professional and business services; and healthcare. Goods-producing industries, especially manufacturing, had a poor month for job creation in August. Purchasing managers' indices for the manufacturing sector confirm the impression of sectoral weakness; the prospects for new orders are softening, probably amid falling demand from Europe especially.

The weak employment gains come at a delicate political moment, as the general election campaign moves into its final stretch. On the one hand, the re-election prospects of the president, Barack Obama, will not be aided by the monthly reminder to voters that the jobs market is still so weak. They may understand that blame for the economic crisis cannot be laid at the feet of the current president, but incumbents still tend to attract considerable blame for the economic situation, especially four years after being elected. On the other hand, the longer the weakness persists, the more the pressure increases on the Federal Reserve (Fed) to loosen monetary policy further in order to boost the economy. If monetary stimulus managed to lift jobs growth or consumer sentiment in the next month or two, it could be enough to hand the election to Mr. Obama. The move would, however, be extremely controversial among Republicans, who would accuse the Fed of taking political sides by taking action at such a politically charged moment. All the same, we do not think that the Fed will let political considerations hamper its decision-making if it sees clear reasons to act. It has already stated its willingness to ease monetary policy in coming months, and the continued softness in employment creation provides a clear reason to do so. Another round of Fed bond-buying, a so-called third program of quantitative easing (QE3), is therefore still on the cards, as U.S. economic growth is still struggling to accelerate. Certainly, in terms of the Fed's dual mandate, there are grounds to ease monetary policy further: both elements of the dual mandate, full employment and inflation, are off-target.

The Economist Intelligence Unit is not particularly optimistic about the labor market picking up again by the end of 2012. We forecast that unemployment will still be at around eight percent by year-end, and only improve gradually thereafter. We expect jobs growth to accelerate periodically, but a sustained pick-up may only occur after the fiscal policy issues associated with the "fiscal cliff" are resolved in early 2013.