Jobs Figure: Worse Than the Headline Number

NEW YORK (TheStreet) -- Last week's main event for U.S. equity markets was the monthly Non Farm Payrolls report, which showed the economy added 169,000 new jobs for the period. This missed the market's consensus estimates of 180,000 but selling pressure in the S&P 500 was offset by a slight improvement in the unemployment rate, which dropped one tick to 7.3%.

This is the lowest level since December 2008. But when we look at the details of the jobs report, some added negatives can be seen. The implications here could be massive, as this essentially indicates the Federal Reserve will have less room to maneuver policy, and begin tapering stimulus programs at its September meeting.

In addition to the miss in the headline payrolls number, figures from the previous two months saw large revisions lower -- with a combined reduction of -74,000 jobs for June and July. The six-month payrolls average is now 160,000 and the real question here is whether or not the Fed feels the economy is in a position to run on its own if less stimulus is pumped into the system.

The unemployment rate is the Fed's preferred metric for making these assessments, but this month's improvements were driven by reductions in the labor force. The participation rate (the number of working-age people in the labor market) dropped to 63%, which is the lowest level since 1978.

Stimulus Prospects

Since a larger number of people have simply given up on finding new jobs, it is clear that consumer confidence should see renewed weakness into the final months of the year. Consumer spending accounts for almost three-quarters of the U.S. economy, so there is little reason for optimism in the latest employment figures.

Other aspects of the economy are looking less dismal, however, with manufacturing productivity and the housing market being key points of strength. Last month's ISM manufacturing data rose to its highest levels in two years, with the service sector expanding at its fastest rate in nearly eight years.

For most of the market, the question is not whether the Fed will start implementing its exit strategy for quantitative easing in September, but by how much. Taken in combination, macro data point to a mixed outlook that favors small reductions in monthly asset purchases over larger ones.

Each month, the Fed purchases $85 billion in Treasuries and mortgage-backed securities, with a majority of the market calling for a $10 billion reduction in Treasury purchases at the September meeting. Anything larger than this would likely send stock markets on a path to monthly declines. But given the latest employment weakness, this looks increasingly unlikely.

At the July policy meeting, the official commentary suggested the Fed is "broadly comfortable" committing to a timetable in phasing-out stimulus programs. This month's payrolls miss does complicate the situation, and when we look at inner details of the report there is even more cause for concern. The unemployment rate remains well above the Fed's target of 6.5%, even with larger numbers of people dropping out of the labor market.

But with evidence of improvement in other areas of the economy, the case for September tapering remains in place. For stock investors, it is important to consider the impact of a clearly weakening jobs market, however, as this suggests the Fed will need to proceed at a slower pace when stimulus reductions are actually seen.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

More from Opinion

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

It's Dumb to Think There Aren't Already Monopolies in Big Tech

It's Dumb to Think There Aren't Already Monopolies in Big Tech

Google's EU Battles Are Hardly a Reason to Panic

Google's EU Battles Are Hardly a Reason to Panic