August Jobs Report is Concerning News for Fed

Disappointing August jobs numbers intensified the economic uncertainty caused by the Delta variant, putting pressure on the Federal Reserve as it considers when to reduce its policy support and on the White House as it tries to get more Americans vaccinated.

Fed officials and President Biden had been looking for continued improvement in the job market, but the Labor Department reported on Friday that employers added just 235,000 jobs in August — far fewer than projected and a sign that the ongoing coronavirus surge may be slowing hiring.

“There’s no question that the Delta variant is why today’s job report isn’t stronger,” Mr. Biden said in remarks at the White House. “I know people were looking, and I was hoping, for a higher number.”

A one-month slowdown is probably not enough to upend the Fed’s policy plans, but it does inject a dose of caution. It also will ramp up scrutiny of upcoming data as the central bank debates when to take its first steps toward a more normal policy setting by slowing purchases of government-backed bonds.

For the White House, the report adds to the urgency to get more Americans vaccinated. Administration officials have no intention of pushing Congress for another jolt of short-term stimulus to help job growth, as Mr. Biden is focused on getting Congress to pass trillions of dollars in spending meant to boost the economy’s performance over the next decade.

“Even with the progress we’ve made, we’re not where we need to be in our economic recovery,” Mr. Biden said, adding that “we need to make more progress in fighting the Delta variant.” The president promised that he would lay out new steps next week to combat the variant, though what they might be remained unclear.

The Fed has been debating when to pare back its bond purchase program, which it has been using to keep many types of borrowing cheap, which bolsters lending and spending and helps the economy heal. Investors have been expecting a start to the so-called taper before the end of the year.

Central bankers have closely tied their policy path to the labor market, putting employment data in the spotlight. Officials have signaled that although the economy has made adequate strides toward the central bank’s inflation goal to justify a slowdown in bond buying, they would like to see continued job gains before they feel confident that they have made “substantial further progress” toward full employment, their standard for removing support.

Jerome H. Powell, the Fed chair, said during a speech last week that as of the central bank’s July meeting, he and most of his colleagues thought they could start reducing the pace of asset purchases this year if the economy performed as they expected.

“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant,” Mr. Powell said, adding that the Fed would be “carefully assessing incoming data and the evolving risks.”

The August jobs report served as an early confirmation that the Delta variant was weighing on activity. Few expected the Fed to announce changes to its bond-buying program as soon as its September meeting, but some economists said the weak data made it less likely that the central bank would even send a strong signal about plans this month. Many continued to expect a decision in November.

“While the report was softer than expected, in our view, it was not weak enough to derail the timeline for the Fed’s formal announcement of tapering,” economists at Goldman Sachs wrote in a note following the release.

The data showed a sharp pullback in hotel and restaurant hiring, which tends to be particularly sensitive to virus outbreaks. The participation rate, a closely watched metric that gauges what share of the population is working or looking, stagnated.

But there were other signs that underlying demand for workers remained strong. Wages continued to rise briskly, suggesting that employers were still paying up to lure people into work. Over the last three months, job gains have averaged 750,000, which is a strong showing. And the unemployment rate continued to decline in spite of the weakness in August, slipping to 5.2 percent.

Mr. Biden sought to portray the recovery as strong but in need of longer-term help. He called on Congress to “finish the job of passing my economic agenda,” including a bipartisan infrastructure bill and a sprawling spending bill that includes investments in child care, paid leave, education, worker training, efforts to combat climate change and more.

He did not call for any new stimulus, which almost certainly could not clear Congress anytime soon. The administration isn’t considering any push to reinstate federal worker supports that are now expiring, such as expanded unemployment insurance benefits.

As the administration moves toward a less pandemic-related policy agenda, the Fed is continuing to focus on the labor market’s healing from the crisis. Mr. Powell and his colleagues have been careful to emphasize that even after it begins to slow bond purchases, the Fed will continue to support the economy with the federal funds rate, which guides short-term borrowing costs and affects consumer rates for mortgages, car loans and more.

Policymakers want to leave that rate unchanged at near-zero until the job market fully recovers. But they are also in charge of controlling inflation, and the Fed’s preferred inflation index picked up by 4.2 percent in the year through July — well above the 2 percent average that officials aim to achieve over time.

Officials widely expect those price gains to slow as the economy returns to normal and supply chain snarls clear up. But they are monitoring consumer inflation expectations and wages keenly: Prices could keep going up quickly if shoppers begin to accept higher prices and workers come to demand more pay.

That’s why robust wage gains in the August report stuck out to some economists. Average hourly earnings climbed by 0.6 percent from July to August, more than the 0.3 percent economists in a Bloomberg survey had forecast. Over the past year, they were up 4.3 percent, exceeding the expected 3.9 percent.

The fresh data put the Fed “in an uncomfortable position — with the slowdown in the real economy and employment growth accompanied by signs of even more upward pressure on wages and prices,” wrote Paul Ashworth, the chief North America economist at Capital Economics.

But improving productivity may give the Fed reason for comfort as wages rise.

If efficiency gains mean that companies can produce far more as they pay a little more, it could prevent unsustainable wage increases that feed into steadily higher consumer prices. Mr. Powell referred to that consideration in a footnote to last week’s speech.

“Today we see little evidence of wage increases that might threaten excessive inflation,” he said.

Plus, it is unclear whether pay gains will remain robust as workers return. While it is hard to gauge how much enhanced unemployment benefits discouraged workers from taking jobs, and early evidence suggests that the effect was limited, a few companies have signaled that labor supply has been improving as they sunset.

Other trends — the end of summer and the resumption of in-person school and day care — could allow parents who have been on the sidelines to return to the job search, though that might be foiled if Delta keeps students at home.

“There’s still so much disruption, it’s hard for businesses and workers to make plans and move forward when you don’t know what’s coming around the next bend,” said Julia Coronado, the founder of MacroPolicy Perspectives, adding that this is a moment of “delicate transition.”