Employment Report Analysis

At first blush, it appeared that the jobs report was disappointing. The addition of 142,000 jobs in August was much less than the average of over two hundred thousand for the previous six months. Yet, the day of the report, the stock market reacted positively and interest rates did not fall as expected. What could have caused this "adverse" reaction? To us there are three possibilities. First, the same day as the jobs report, a cease fire was signed in Ukraine. As we have said previously, the world news is over-shadowing our domestic economic news this summer. If the truce holds, this is a positive indicator for the stock market but not necessarily positive for the continuation of lower interest rates.

Secondly, the markets may be betting that the lower number of jobs added might be a one-time occurrence. The jobs numbers are often revised in future months and the markets are not likely to get upset over one report. Now, if we get two or three reports below an average of 150,000 jobs each month, this could be worrisome to the markets. Looking at other indicators such as first time claims for unemployment and the ADP private payroll report, there was no indication that the job creation machine slowed down last month.

Finally, even if the production of jobs does slow down, the markets may not be too upset. Slower job growth might cause the Federal Reserve Board to keep short-term interest rates lower for a longer period of time and nothing would boost the stock market more than the prospect for a continuation of lower rates. This factor would apply if the production of new jobs does not slow any further from here. As we indicated last week, it is a good sign with regard to how far we have come in our recovery for the markets to now consider over 140,000 jobs created in a month a poor performance. Which of these factors is correct? There could be a bit of truth in each theory. You can bet on the fact that the Federal Reserve Board's Federal Open Market Committee will be considering these possibilities as they meet this week.

Mike Ervin
Branch Manager/Mortgage Loan Officer
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