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Will August job report propel the Fed into action?

(MoneyWatch) The unemployment rate fell to 8.1 percent in August and there were 96,000 nonfarm jobs created, according to a report from the Bureau of Labor Statistics. The number of jobs created, 103,000 in the private sector and a loss of 7,000 in government, was less than many analysts expected, and it reflects an economy that is growing fast enough to keep up with population growth -- the number of new jobs last month is roughly equal to new entrants to the labor force -- but it is not enough to make headway on our unemployment problem. The unemployment rate did fall slightly from last month's 8.3 percent, but that is due to a decline in the labor force and a fall in labor force participation rather than job growth. Much higher job growth than we saw last month will be needed to provide employment for the millions of unemployed.

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There were other signs of a stagnating labor market as well. The numbers from earlier months were revised down, average hourly earnings fell slightly, and the number of part-time workers, which often signals future labor market developments, declined. In addition manufacturing jobs -- one of the bright spots earlier in the year -- fell by 15,000.

How will the Federal Reserve react to this news? Ben Bernanke has indicated that the Fed will be watching the employment numbers closely, and if the labor market continues to struggle more action from the Fed is likely. There have been some positive signs in the economy lately, for example new claims for unemployment insurance have been relatively low, and consumer spending has been relative high. It seems clear, however, that the higher levels of growth we saw earlier in the year have faded and the economy, the labor market in particular, is stagnating. Thus, it also seems clear that the likelihood of the Fed doing more to stimulate the economy has increased, and is certainly entered the more likely than not range. Fear of inflation among some members of the Fed's monetary policy committee has been standing in the way of more action, but with both headline and core inflation numbers running near or below the Fed's target rate, those objections will be hard to sustain.

Chairman Bernanke has also emphasized in recent speeches that the economy could use more help from fiscal policymakers, but with the election on its way and with the severe political gridlock in Congress, the chances of more help from fiscal policy, either from tax cuts or more spending, is very, very low. The Fed knows this -- if the Fed doesn't intervene then there will be no help for the economy at all -- and that's another reason to expect the Fed to do more.

There is no certainty, of course, that the Fed will act at its next meeting  (Sept. 12 - 13), and if strong economic data arrives between now and then the odds of Fed action drops dramatically. But the next meeting is not far away, so the picture is unlikely to change much and as of now the chances that the Fed will do more are very high.

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