Friday, August 03, 2007

Slowing down 

The slow drip of slowing economic news continued today with the employment report. The number came in below forecast:
Job growth slowed to 92,000 in July, from 126,000 the prior month, the Labor Department said today in Washington. The jobless rate increased to 4.6 percent from 4.5 percent. A separate report from the Institute for Supply Management showed service industries, which include banks and retailers, expanded less than anticipated.
Expectations were for a 126,000 increase, and was based on a previously-reported increase of 132k for June. Birth-death model issues are discussed by Barry Ritholz, who I think can be credited for getting this number right. Calculated Risk notes that private employment was much stronger than the ADP figure I reported a couple days ago. Other reactions here from the WSJ Economics blog, including Ian Shepherdson's note that the household employment data have averaged only 26k per month, almost 100k less than the payroll data. It may be months before we figure out that divergence. Separately, James Hamilton uses a weighted average of the three and gives us a smaller increase of only 60,000.
Some would argue, and quite legitimately, that we should not put too much stock in one month's numbers, and the poor July numbers look better when you average them in with the strength reported for June. Even so, things at the moment don't look so great to me.

UPDATE: Two forecasters who previously were calling for a Fed rate increase have folded those hands.

However, both still expect the Fed�s next move to be an increase in rate, some time in 2008. �In making this change we recognize that recent financial market stresses increase the risk of a financial market accident that forces the Fed to respond by easing. We do not however, place a significant probability on this event at this stage (15%),� JPMorgan said.

Most economists expect the Fed to leave rates unchanged next week and Fed funds futures markets remain convinced that the Fed will cut rates by a quarter-percentage point to 5% by the end of the year (and even priced in a 47% chance for further ease to 4.75%).

While most economists have agreed for some time that the Fed is on hold through December, JPMorgan and Barclays weren�t alone in predicting a rise. In the June WSJ survey of economic forecasters, one in six economists expected an increase in rates. However, since that time worsening credit conditions, a continued housing slump and a benign inflation outlook have made that position more difficult to maintain.