NEW YORK ( TheStreet) -- In the looking-glass world of Wall Street, "weak is the new strong."

That's the argument for raising interest rates as soon as next month, put pithily in a note by Wells Fargo. But this week's events, including the Labor Department's report on job openings and labor turnover this morning, show that weak is still just weak. Likewise, the case for the Federal Reserve to boost the Fed funds rate September hike is getting weaker and weaker.

The government reported that employers are looking for 5.25 million workers as of June 30, down from 5.36 million the month before. The so-called JOLTS report includes several of the less-popular metrics Federal Reserve Chair Janet Yellen is tracking to gauge the state of the labor market, and none of them moved in a way that paints the economy as gaining steam and looking strong enough to withstand the course of rate hikes that will follow the first one.

The rate at which workers quit their jobs -- a sign that they either have new work lined up or think they can do that quickly -- was unchanged at 1.9% of all workers, for the third straight month.  The rate at which workers are fired or laid off was also unchanged. All of these measures are roughly at, or better than, they were in 2004 when the Fed began to boost rates, though job openings missed Wall Street forecasts.

Coming the day after China's surprise devaluation of the yuan roiled markets in both Asia and the U.S., the JOLTS news supplies a 1-2 punch to the case for September, which appeared near-certain as recently as five weeks ago and still appears to be supported by at least four of 10 voting members of the Fed's Open Market Committee.

The case to wait boils down to two words: Uncertainty and slack.

The newest source of uncertainty is the turmoil in China, which by some measures is the world's largest economy. It's not just the currency drop, or the big move down in Chinese stock indices since June. The more-persuasive reason to fret about China is that it's exposing just how much of a black box China has been, as the government takes measure after measure to prevent short-selling, direct money into supporting stocks and, now, devaluing its currency a second time, a day after describing its move Tuesday as a one-time thing.

It's increasingly evident that humble people should not assume they understand how good or bad a shape China is in, with growth slowing and a pretty fierce property bubble that has been unwinding but has a long way to go. 

"If the People's Bank of China continues to set the spot rate according to the previous day's closing central parity rate, the yuan could probably depreciate rapidly in the near term," PNC international economist Bill Adams said in a note to clients. "It now seems likely that the yuan will depreciate by perhaps 10 percent against the U.S. dollar over the next 1-2 months."

That means Chinese exports get cheaper in the U.S. and U.S. exports become more expensive in China: Bank of America Merrill Lynch economist Ethan Harris says a stronger dollar is likely to shave about half a percentage point off of U.S. growth. That's one reason the gross domestic product grew at less than a 1.5% annual rate in the first half of the year.

China's not the only uncertainty: There's still Greece, and all the potential for European disruption its debt default implies. But China's uncertainty, and its impact on U.S. exports, as companies such as  Caterpillar (CAT) and United Technologies (UTX) gave cautious forecasts in recent weeks, highlight just how much slack there still is even in the U.S. economy.


After China made its currency move, oil prices fell 4% and copper dropped more than 8%. With the JOLTS report in hand, there is more than enough evidence in recent data that there is plenty of slack left in the economy and the labor market before the Fed needs to act, or really should.

Consider:

  • The economy's first-half growth rate was less than half of what many economists were predicting for full-year 2015. And job growth has been decelerating from last year's brisk pace.
  • Capacity utilization, a measure of how many factories are partly idled, is running seven percentage points below the normal level during the middle periods of past expansions.
  • There are still 6.3 million people working part-time because they can't find full-time work -- about 1.9 million more than when the Fed first raised rates in 2004.
  • Oil is at $44 a barrel and gasoline prices are likely pierce $2 a gallon after Labor Day, when expensive mandates for less-polluting summer fuel mixes expire as the weather gets cooler.
  • There is still no meaningful move on nominal wages, though workers are regaining purchasing power through a combination of low inflation and the 2.1% gain in average hourly compensation the Labor Department reported for the 12 months ending in July.

Wall Street has been talking itself into the idea that a September hike is necessary or likely, to the point where it's almost a self-fulfilling prophecy. And one level of the lengths this trend is going to is Wells' note today.
"The revised data reveal an all too familiar pattern that show consensus expectations and the expectations of policymakers have been far too strong for far too long," said the report, which wasn't signed but is attributed to the bank's entire economics team. "The new reality appears to be that 2 percent economic growth, a pace that used to be thought of as weak, is now strong enough to cut into the excess slack in the labor market and pave the way for higher short-term interest rates."
Really? That's not what the JOLTS report really indicates, and it's definitely not what the wage data say.

Yellen's watchword in approaching rate hikes has been "data dependency." And the data, here and abroad, are less bullish than they were when the Fed met in June  or even July. If that were to change before September, and especially if China stabilized and the dollar softened, then maybe the Fed should go ahead.

But if the Fed moves in September, it will tell markets that "data dependency" is just a slogan.