There's a special significance to the monthly jobs report that will be released Friday morning. It could tip the balance for the Federal Reserve. Policymakers are weighing whether to raise the Fed's official interest rates later this month. It's something the Fed hasn't done since before the Great Recession.
Surveys of economists are predicting that job growth in August will be right around the current trend of about 220,000 new jobs a month, and they think the unemployment rate will tick down a notch to 5.2 percent.
Megan Greene, chief economist at Manulife Asset Management, says that sounds about right. But she says she doesn't think that will necessarily convince the Fed to raise rates later this month. She says the reason to hike rates is to head off inflation, and there's no inflation in sight.
Federal Reserve Vice Chairman Stanley Fischer speaks during a Board of Governors of the Federal Reserve System meeting in July.
Greene believes that's because U.S. wage growth has stagnated as U.S. workers compete with an oversupply of cheap labor around the globe.
"As long as there is this oversupply of cheap labor, we're not going to see wages start to push up in the U.S. really, and as long as wages aren't pushing up, inflation isn't pushing up," Greene says.
If wage increases are meager, workers don't have enough disposable income to compete for goods and inflate the price of things like houses or furniture or restaurant meals.
But the vice chairman of the Federal Reserve Board of Governors, Stanley Fischer said last week that if the Fed waits until it actually sees inflation, it will be too late. And many economists argue it's time for the Fed to act. They point to strong auto sales, growth in construction spending, an unemployment rate heading toward 5 percent and solid growth numbers in the spring.
But Greene isn't convinced. "The labor market is very slowly improving but I don't think it justifies a rate hike. Particularly when you consider all the risks, externally, and that includes China and volatility coming from China, but also don't forget the Greeks are going back to the polls on September 20th," she says.
That's just three days after the Fed meeting. Greene says there's a good chance the Greek outcome could spark more financial uncertainty. That would add more volatility to global financial markets still recovering from their convulsions over the slowdown in China's growth. Greene says the U.S. economy could suffer negative impacts as a result, so the Fed should remain cautious.
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Transcript
RENEE MONTAGNE, HOST:
And we have mixed messages this morning on American jbs from the monthly employment report out today. Job growth in August was much lower than expected, but the unemployment rate fell to 5.1 percent. As NPR’s John Ydstie reports, it likely leaves Federal Reserve officials still mulling over whether they should raise interest rates later this month.
JOHN YDSTIE, BYLINE: Many analysts had hoped the August employment report would answer the question about whether the Fed would finally raise interest rates for the first time since the great recession. The drop in the unemployment rate last month to 5.1 percent would seem to support a rate hike. It’s a level Fed officials have suggested was their goal, but the disappointing job creation – just 173,000 new jobs – would argue for the fed to hold off. Megan Greene, chief economist for Manulife Asset Management, thinks the Fed should not raise rates this month, but, she says, she looks past the headline numbers to come to that conclusion.
MEGAN GREENE: We actually shed about 24,000 jobs in goods-producing sectors. And goods-producing sectors tend to be the higher-wage sectors.
YDSTIE: That decline included a loss of 17,000 manufacturing jobs and further losses in the oil sector. And half the jobs added in the private sector were low-wage jobs in areas like retail and leisure industries.
GREENE: You know, that’s not great news. It means that if we’re adding all these jobs in low-wage sectors, we’re not going to get a whole lot of wage growth, and the average hourly earnings figure reflected that.
YDSTIE: Over the past 12 months, average wages have risen just 2.2 percent, a very weak number for a U.S. recovery. Greene says wages aren’t rising because there’s a huge oversupply of labor around the world.
GREENE: So companies don’t have to just hire within their national borders anymore. They can go off and hire cheap workers anywhere. And so if there’s such an oversupply of labor, you know, it’s going to be hard to get wages up. And as long as there isn’t much upward pressure on wages, there won’t be much upward pressure on inflation.
YDSTIE: In fact, inflation in the U.S. is far below the Fed’s 2-percent target – another reason the Fed should hold off raising rates, says Greene. But other economists point out that August numbers historically get revised upward by about 75,000 jobs after the initial report. That could mean monthly job growth was actually close to a quarter million. Those economists argue that’s a sign the Fed should raise rates soon. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
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