Payroll Day Blues: Economy Adds Just 96,000 Jobs in August

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Current and former military personnel stand in line for interviews at the Opportunity Job Fair on Sept. 6, 2012 at the old Naval Training Center in San Diego, Calif.

The Democratic party spent all week (and millions of dollars) trying to convince voters to return President Obama to office in November. But perhaps the most important set piece — the August employment situation report — was completely out of their hands. Unfortunately for President Obama and his supporters, the U.S. economy did not oblige, adding only 96,000 new jobs in August, missing economists expectations of 125,000 jobs gained. That number, combined with downward revisions of the previous two months’ figures, takes some of the wind out of the argument the President made last night that the economy is slowly but surely recovering, and that the recent spring swoon — the three months between April and June when there were no more than 87,000 new jobs added — was just a blip on the radar.

If there’s anything worth stressing in an analysis of a monthly jobs report, it’s that you can’t draw any conclusions from just one report or even three. One would be foolish to base a vote for president on one report alone, but there’s no denying that today’s number will at the very least distract from the President’s message and get the nation talking again about our stubbornly poor employment situation. And a deeper look into the numbers doesn’t provide much reason for optimism either. Manufacturing employment actually declined by 15,000 jobs in August, and the average hourly earnings for all employees fell by 1% to $23.52. And the fact that job gains in June and July were revised down from 64,000 to 45,000 and 163,000 to 141,000, means that the total jobs gain in this report from the last is only 52,000.

While this jobs report and the following two will no doubt set the tone for this fall’s presidential election, the more immediate impact might be felt at the Federal Reserve. It was clear from Ben Bernanke’s speech last week that he stood ready and willing to initiate another round of monetary stimulus if economic conditions warrant. The Fed’s dual mandate to promote stable prices and full employment means that the central bank’s chairman will be paying close attention to today’s number, and it may in fact be the final consideration in the decision whether to launch another round of bond buying, otherwise known as QE3.

So how will today’s jobs number be interpreted by the Federal Reserve? It’s impossible to say for sure, but 93,000 jobs per month does not represent the kind of job growth that will do anything more than keep up with population growth. And while the unemployment rate technically declined from 8.3% to 8.1%, that decline was mostly due to workers dropping out of the labor force. The total number of unemployed persons remained steady at a staggering 12.5 million people, 5 million of whom have been unemployed for 27 weeks or more. With inflation low and unemployment so distressingly high, further stimulus from the Fed could be just around the corner.

At the same time, Bernanke himself laid out the case for restraint in his speech last week. “Non-traditional monetary policies have potential costs that may be less relevant for traditional policies,” he said. “For these reasons, the hurdle for using non-traditional policies should be higher than for traditional policies.” In other words, the magnitude of bond buying the Fed has engaged in is truly unprecedented, and although economic theory may say that further expansion of the Fed’s balance sheet would help bring down unemployment, there are side effects to these policies that are unknown and potentially dangerous.

But at a certain point, those potentially bad side effects will be overshadowed by the very distressing reality we’re living in now. And with fiscal policy hamstrung by a fierce political election, the central bank is the only part of the government that has the capacity to act. The political effects of the job report are unknown at this point, as there will be two more jobs reports between now and ballot day (including one just five days before the November election), but we will find out what the Federal Reserve thinks of all this when it next meets on September 12.