September’s employment release was somewhat mixed but on net modestly better than expected, with the economy adding 114,000 jobs in September and upward revisions to July and August payrolls. The positive surprise in the report came in the form of the unemployment rate dropping sharply in September to 7.8%. Since August’s disappointing jobs report, labor market news had been somewhat mixed. Initial jobless claims have been volatile, but beat expectations in the final weeks of September. Wednesday’s ADP employment report also surprised to the upside; however, recent data from the Institute for Supply Management suggested a weakening in service sector labor conditions.
The Fed’s new asset purchase program (QE3) announced in September is targeted specifically at the floundering labor market. Beyond just the headline unemployment rate, Fed Chairman Ben Bernanke recently characterized labor market conditions as a “grave concern.” Given the massive liquidity already in the system, the effectiveness of additional easing remains a major question. Nonetheless, the perception is that the Fed’s hands are increasingly tied and a greater effort on the fiscal front may be needed to move the economy forward from here.
Understandably, the state of the economy has become the focal point in this presidential election. As the November elections near, the jobs market and household financial circumstances will remain squarely in the spotlight. While the markets continued to rally through September, a notoriously volatile month, the troubling inconsistency to economic data may rein in any excessively positive investor reaction to the jobs report. Investors are likely to view the report for what it is: reasonably good news, but not decisive evidence that the economy has turned the corner and is poised to accelerate.
All things considered, today’s report is a modest surprise and the decline in the jobless rate is a positive development for the economy. Nonetheless, the bottom line is that the economy appears to be grinding along at a pace that is universally unsatisfying, and well short of the pace needed to ramp up the still lackluster pace of job creation and promote better household income growth. There’s no question that the economy remains in a window of vulnerability, with the fiscal cliff looming large on the horizon.