US economy's jobs slowdown raises doubts about interest rate rise

A slump in world trade and a slowdown in China took their toll on the US economy last month as surveys revealed that firms delayed hiring and factory orders contracted.

US businesses created only 142,000 jobs in September, according to official figures, about 64,000 fewer than expected by analysts. The report by the US Labor department also found that employers kept average pay rises at zero and thousands of workers quit the labour market, taking the participation rate back to levels last seen in the 1970s.

The much anticipated data was widely seen as ending any expectations of an interest rate rise by the US Federal Reserve before Christmas.

The lack of any pressure on wages is likely to be the biggest factor persuading Fed officials against a rise from the current rate of near zero, which was anticipated last month until it became obvious that the slowing Chinese economy and the panic it caused on global markets formed a powerful case against a rate rise.

Separate surveys added to the gloomy picture, showing that US factory orders fell 1.7% in August, compared with expectations of a 1.3% decline, and business activity in New York contracted for the first time in eight months in September.

The Dow Jones fell more than 200 points on the news. By midday, Dow Jones, Nasdaq and S&P 500 had recovered from their initial shock and were back in green. The Dow Jones closed with a 200 point gain. The FTSE 100 shrugged off the news as investors welcomed the prospect of ultra-low interest rates until at least next year. The index of Britain’s top 100 companies closed up nearly 1% at 6,129 points.

James Marple, senior economist at TD Bank, said: “The weakness in the global economy is washing on to American shores.”

Gus Faucher, senior macroeconomist at stockbroker PNC, said he was not taking much solace from the US unemployment rate remaining at 5.1% when it was only because the US labour force participation declined to 62.4%, from 62.6%, during the past three months. This is the lowest labour force participation rate since 1977.

“There is no question that this is a disappointing report. Normally, if you get this kind of a report, you might find some silver linings in it. There is nothing here that I would point to as a silver lining,” Faucher said on Friday.

“Unemployment rate was steady but we still had big declines in the labour force. Average hourly earnings were flat. We got downward revisions to July and August and pretty substantial ones.”

Last month, the non-farm payroll figures for June and July were revised up, causing the unemployment rate to drop to 5.1%. August’s numbers were lower than expected, although many economists pointed out that the figures for August are usually revised up. However, in Friday’s report, the figures for both July and August were revised down.

July’s figure was revised from 245,000 to 223,000, and the change for August was revised from 173,000 to 136,000, meaning that 59,000 fewer jobs were created than previously reported.

Over the last three months, job gains have averaged 167,000 per month. Last month, that figure was reported to be 221,000.

So far in 2015, job growth has averaged 198,000 per month, compared with an average monthly gain of 260,000 in 2014, according to the US Labor department.

Janet Yellen, chair of the US Federal Reserve, said in September that continued job growth and 2% inflation would indicate that the US economy was ready for a hike in interest rates.

Yellen has said she expected that interest rates would be raised before the end of the year if the US economy continued to show signs of improvement.

The US markets have been on a wild ride during the last couple of months thanks to China’s market turmoil, Greece’s debt crisis and the uncertainty about the interest rate hike. In her press conference announcing that the Fed would not raise interest rates in September, Yellen said the slowing of China’s economy had long been expected and that it was not the Fed’s policy to respond to ups and downs in the markets.

“We are not going to see a rate increase in October – we haven’t been expecting one but I think this kind of rules that out,” said Faucher. “That being said, I think that the December rate hike is still on the table. It’s looking certainly more iffy than it did even just a few days ago. If I were on the federal open market committee [of the Federal Reserve], I’d be looking very closely at this report and thinking very hard about whether I want to raise rates in December.”

Jim O’Sullivan, chief economist with High Frequency Economics, agreed that the Fed will hold steady this month, but said there are two more jobs reports before it meets again in December.

Faucher said September’s weak jobs report is only a temporary weakness. “The thing that puzzles me is that other indicators have looked very solid in late September. Housing market, generally, is looking good. Consumer spending is good. We had a great number on auto sales yesterday,” he said. “So there seems to be a disconnect between what we are seeing in the economy and what we are seeing in the labour market.”