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    Reality Strikes, Jobs Report Deflates Fed Narrative

    If the Federal Reserve is counting on a robust labor market to prove the U.S. economy is strong enough to withstand the first Fed Funds increase in seven years, Chair Yellen and company will have to wait a few more months for proof.  

    The economy created just 142,000 jobs in September, far fewer than the 201,000 median forecast and revisions to July and August eliminated 59,000 more, reported the Labor Department in the Employment Situation Report today. The unemployment rate remained at 5.1 percent, wage growth was flat and the labor participation rate fell to a generational low. 

    Credit markets responded vigorously with 10-year Treasury yields falling below 2.0 percent of the first time since August 24th. This benchmark bond had not closed below that level since April 27th.

    The 2-year Treasury lost almost 11 basis points after the release, touching 0.5379 percent, its lowest yield since August 24th, but by mid-afternoon the return had recovered to 0.5735 (1:08 pm). As recently as September 16th the yield had closed at 0.8108 percent, its highest in over four years, as the markets had anticipated a 0.25 percent rate increase at the September 17 FOMC meeting. 

    Equities plunged at the open with the Dow shedding over 250 points to 16,013 within 25 minutes. But by early afternoon, extending a long climb that began just minutes after the bottom, the average had soared to 16350, ahead by 154 points. 

    The U.S. Dollar lost ground in the first minutes of trading, with the euro flying almost 150 points higher, topping at 1.1319, its highest price in two week. But here also the initial reaction faded, and by 1:30 pm the euro had fallen back to 1.1220 about half way to its 1.1157 starting point.

    The Dollar/Yen also saw a violent reaction followed by a slow recovery, dropping from 120.41 just before the 8:30 am release to 118.68. By early afternoon it was back within 50 points of the high at 119.94. 

    The third quarter has seen a sharp drop in job creation. In the first quarter companies averaged 195,000 hires. In the second that rose to 231,000, but in the last three months the average has fallen to 167,000, a 28 percent decline.

    In the first three quarters of this year American firms have hired almost 25 percent fewer workers per month than they did in 2014 with the average falling to 198,000 from 260,000 last year.

    Private payrolls added 118,00 workers in September, far less than the 197,000 forecast and August's total fell to 100,000 from 140,000 after adjustment.  Manufacturing payrolls dropped by 9,000 and a revised 18,000 in August.

    American factories have been unable to increase their work force this year averaging just 1,900 new positions each month as the global slowdown has rolled through manufacturing. That is a far cry from the 18,000 hired each month in 2104.

    Even service industries, which make up about 70 percent of GDP and, being largely domestic are less affected by global economic conditions, seem to have dropped into a lower gear. Payroll growth there has declined for four straight months, the longest such streak since 2001.

    Average hourly earnings, the wage statistic that the Federal Reserve has counted on to begin rising as the labor markets tightened, was unchanged in September, belying the 0.2 percent median prediction.  August's increase gained on revision to 0.4 percent from 0.3 percent. Wages were 2.2 percent higher on the year, less than the 2.4 percent forecast and the same as in August.  Weekly earning actually fell slightly in the month to $865.61 from $868.46. 

    Wage growth has been stagnant since the beginning of 2010, with an average of just 2.0 percent annually for the period. That is only a bit more than half the annual increase before the recession. With headline CPI averaging 1.8 percent for the time, households have seen essentially no growth in purchasing power for more than five years. 

    Not only were workers earning little more in the month but their time on the job was less as well. Average weekly hours fell 0.1 to 34.5, its first drop in three months. 

    Perhaps the biggest disappointment in a very poor report was the continuing decline in the labor force participation rate. It dropped to 62.4 percent in September from 64.6 percent prior as another half a million Americans exited the workforce. This brough the total number of people out the labor forece to 94.6 million, the highest on record.  One has to go back almost 40 years to 1977, in a vastly different cultural environment, before women had begun join the work force in large numbers, to find a rate equally low.

    Economists estimate that the steady fall in the participation rate over the past seven years is due about equally to the onset of retirement for the post war generation, the first five years of which reached 65 in 2010, and discouraged workers dropping out of the workforce entirely. 

    There was nothing in this payroll report to cheer optimists at the Fed who have long assumed that the fall in the unemployment rate was a sign that wage growth was just around the next monthly corner.  If anything the last two months may represent a new and serious stagnation. 

    Another report or two like this and the FOMC will have to find a new economic rationale for raising interest rates.  


    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

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