We are heading into the Labor Day weekend with persistent labor market weakness and great uncertainty over the direction of the economy. This is a tough situation for policymakers and taxpayers.
All eyes this week were on today’s unemployment report, the first solid glimpse of the economy in August and labor market trends going forward. Because the report was stronger than expected, markets shifted from a deflation to a growth play (which meant – as usual – that markets shifted from bonds to stocks in the US market).
In the lead-up to today’s report, growing concerns about deflation (fanned by recent commentary, including some of the Fed’s Jackson Hole-related statements, and preliminary employment reports), strong demand for the benchmark 10 year bond had put interest rates at the lowest points since the crisis kicked into high gear at the end of 2008/beginning of 2009.
Still, today’s adjustment to employment news was quick and one-off: while today’s employment report was stronger than expected (a small gain in private sector jobs, including the leading indicator “temporary help supply employment” and construction, one of the contributing sectors to our recession), the overall trend going forward remains unclear and of concern. Employment creation remains sub-par, the unemployment rate uncomfortably high – to say the least (particularly if long-term unemployment is included), and employment hours (also considered a forward indicator) remain low.
Market sentiment – at least as of this am – is that indicators will not be considered sufficiently weak for the Fed to be tipped in the direction of quantitative easing, which had been considered more likely in the event of weak data coming out today.