Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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A child playing jump-rope (which children don’t actually seem to do any more), will wait for just the right moment, when the rope is in precisely the right position, to begin jumping. The Federal Reserve, similarly, appears to be waiting for the right moment, when the economic moon and stars and planets are all perfectly aligned, to boost interest rates. It hasn’t found that moment yet.

The Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, decided in September once again to delay a rate move, concluding that the risks of bruising the economy still outweigh the risks of igniting inflation.

“Our decision does not reflect a lack of confidence in the economy,” Fed Chair Janet Yellen insisted after the meeting. But with inflation still subdued, the August employment report a bit weaker than hoped, and business investment still below par, she said, FOMC members decided “it’s better to err on the side of caution.” That view was not unanimous, however; three Fed governors reportedly opposed the decision, arguing that the Fed should act before the economy begins to overheat rather than waiting until the fire is raging.


The job market continues to chug along. Employers added 156,000 workers to their payrolls in September after an August increase that was revised upward to 167,000 I August. The unemployment rate increased slightly to 5 percent, as more job seekers entered the market, pushing the labor participation rate to a six-month high.

Economic Growth

The economy performed better in the second quarter than initially reported. The growth rate (1.4 percent) was hardly robust, but it was bit quite as flat as the 1.1 percent estimate had suggested. Economists were particularly encouraged by a1 percent annually increase in business investment - -the first positive number in that category since the third quarter of last year.

“When it comes to business investment over the past few years, you take whatever good news you can find, because there hasn’t been much of it,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note to clients.

Buoyed by that trend, the Atlanta Fed is predicting that GDP will increase at a 2.8 percent rate in the third quarter - a little below the 3 percent consensus forecast of economists polled by MarketWatch. The Federal Reserve, on the other hand, has scaled back its estimated growth for the year from 2 percent to 1.8 percent, largely because of uncertainty about the international economic outlook.


Americans are finally gaining some economic traction. Household income increased by 5.2 percent - -the first significant gain in eight years, slightly exceeding the rate of increase in home values. “That’s the good news,” according to Zillow Chief Economist Svenja Gudell. The bad news: “Incomes are so far behind that they need to do a lot of catching up before homes become more affordable, especially for those at the bottom of the income distribution and in the country’s most expensive markets.”


Existing home sales slipped in August, falling almost 1 percent to their lowest pace of the year and disappointing analyst who were expecting sales to build don the July gain. Pending sales, an indicator of future activity, also declined, as skimpy inventories limited options for prospective buyers and rising prices put many available homes beyond reach for first-time buyers. "We go back to the same bottom line: lack of inventory choices and prices rising way too fast," Lawrence Yun, NAR's chief economist, said.

Inventory levels have declined by more than 10 percent over the past year, now hovering near record lows. Home prices, measured by the Case-Shiller indices, increased by 6.2 percent year-over-year in August, putting them just below their pre-crash peak in the spring of 2006. The upward price trend “probably is not sustainable over the long term,” according to isn’t sustainable, according to David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. But with most economic fundamentals strong, and mortgage debt outstanding well below the pre-crash peak, he says, “There is no reason to fear that another massive collapse is around the corner.”

New home sales posted their largest decline in a year in August after reaching a nine-year high in July. Home construction activity also slipped in August, reversing two months of steady gains. But builder confidence reached its highest level in more than a year in September, as industry professionals focused on income gains a strengthening job market, and an increase in permits for single-family homes as positive indicators for the balance of the year.