After the weaker-than-expected August non-farm payrolls report, many market watchers are speculating that the Federal Reserve (Fed) will stick with a mid-2015 time frame for raising rates and won’t be announcing an earlier-than-expected rate hike at its upcoming September meeting.
In my opinion, however, we could still see a rate policy transition earlier than many anticipate. Here are three reasons why.
Despite the disappointing August data, the labor market is improving. First, I wouldn’t put too much weight on August’s weak numbers. Summer is traditionally a weak period for hiring and August jobs report numbers are often revised higher.
In fact, 14 of the last 18 August payroll reports have been below expectations, while 12 of the last 14 August employment releases have ultimately been revised higher. Hence, I’m eagerly awaiting the normal revisions to this number. In the meantime, with prior 3-month, 6-month, and 12-month moving average nonfarm payroll gains of 207,000, 226,000 and 207,000, respectively, the current run-rate in job creation is still on par with that of past periods of economic expansion.
In addition, other labor market indicators are pointing toward improving conditions. The U-6 unemployment rate has been declining to dramatically lower levels; initial jobless claims remain around pre-crisis levels; and metrics from Fed Chair Yellen’s favorite labor market indicator – the JOLTs report – are consistent with pre-crisis readings.
Indeed, my team has created an index of various labor market readings, which we’ve dubbed the “Yellen Index,” to gauge how the labor market compares to periods over the past 11 years. The index’s recent readings have been at levels last seen prior to the middle of 2008, and they’re approaching levels last seen before the onset of the last financial crisis, i.e. when rates were much higher than they are today.