All eyes are on this week’s important Federal Reserve meeting, in which many analysts expect that the Federal Reserve will decide to begin to lower its $85.0-billion-per-month asset purchase program.
But things might not be that easy, since the report on job creation released last Friday is showing signs of deceleration.
Job creation is obviously the all-important factor that everyone wants to see. Without job creation, an economy begins to slow down.
According to the latest data, total job creation for the month of August was 169,000, a little lower than expectations of 178,000. The unemployment rate did fall to 7.3% during the month of August from 7.4% in July. (Source: Bureau of Labor Statistics, September 6, 2013.)
On the surface, these numbers look pretty decent. However, the reason for the unemployment rate falling was due to a further decrease in the labor participation rate, now at 63.2% in August, the lowest since 1978. On top of that, last month’s job creation data was revised downward, from 162,000 new jobs to only 104,000 for the month of July.
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The Federal Reserve will certainly take into account these facts when considering its next policy move. While it is true that job creation is still positive, it appears that the rate of job creation might be decelerating.
As people continue to leave the workforce, this drives down the unemployment rate, and while some might think a lower level is good, it doesn’t show us the entire picture. We need more people entering the labor force, and this move is an indication that job creation is more sluggish than the Federal Reserve would like to see.
The real problem for the Federal Reserve is that this is just one data point, and others are indicating that a recovery in the economy is coming, and along with it should be some level of job creation.
Last week also saw the release of the Institute for Supply Management’s (ISM) report, which noted an increase in the Purchasing Managers’ Index (PMI) for both manufacturing and non-manufacturing industries. (Source: Institute for Supply Management, September 3-5, 2013.)
This leaves the Federal Reserve in a bind, as the data for the past month show a deceleration in job creation, but some forward-looking data is turning increasingly positive.
If the Federal Reserve moves too quickly, they could put a drag on job creation and the economy before escape velocity has been reached. If they move too slowly, this could cause issues with imbalances in the economy.
I would caution readers that over the next few weeks, the market will be quite volatile, regardless of the outcome. Because so many portfolio managers are ready to adjust their strategies based on this Federal Reserve meeting, this could cause significant moves in the market.
At the end of the day, I do think that the Federal Reserve will begin to reduce its asset purchase program by the end of the year, perhaps September or even as late as December.
While job creation is not occurring at a rapid rate, I think the risks of the current asset purchase program are rising, and this will cause the Federal Reserve to at least begin, at the margin, a shift in monetary policy.
We’ve already begun to see the result: higher interest rates. I’ve been telling readers to expect higher interest rates for almost a year now, and while the Treasury market might consolidate the move over the past couple of months, higher interest rates are here to stay.
This article How This Week’s Fed Meeting Could Impact Your Portfolio was originally published at Investment Contrarians