Treading water, economy added 169K jobs in August

(MoneyWatch) The U.S. economy added 169,000 jobs in August, shy of analyst forecasts amid signs of weaker labor market growth earlier this summer.  

The nation's unemployment rate fell a tick to 7.3 percent, from 7.4 percent the previous month, the U.S. Labor Department said Friday. Economists had expected August payroll gains of around 175,000 new jobs. Retail and health care companies added the most jobs for the month, while restaurants and bars, business services and wholesaler also grew their payrolls. State and local governments added 17,000 workers, while federal hiring was flat.

Although the monthly jobs reports are key measures of the health of the economy, the August figures are under particular scrutiny because they represent the most important government economic data release before Fed officials meet later this month to discuss monetary policy. Many experts predict that the central bank will use that meeting to announce plans to start scaling back its $85 billion in monthly Treasury and mortgage bond purchases, a policy known as "quantitative easing," or QE, aimed at stimulating the economy by holding down longer term interest rates.

• GDP: Hardly booming, but no swoon in sight
• Job growth slowed in July
• Heavy debt wrecking health of young Americans

Mounting investor speculation that the Fed is set to begin "tapering" its bond purchases has pushed up interest rates and caused stocks to gyrate. Some experts think the central bank is likely to announce the policy shift at the Sept. 17-18 meeting because Fed Chairman Ben Bernanke is scheduled to hold a press conference to discuss its plans. He is not slated to address the media at the next two-day policy gathering on Oct. 29-30, which would deprive Bernanke of a chance to make the Fed's plans as explicit and clear as possible.

Despite the subpar job-creation, some economists think the Fed remains likely to announce a reduction in bond purchases this month. 

"The combination of an OK August payroll and another dip in the unemployment rate, to just 0.3 percent above the point at which the Fed wants to stop QE altogether, means that the tapering announcement is still very likely to come this month," said Ian Shepherdson, chief economist with Pantheon Macroeconomics in a research note.

Whenever the Fed begins to ease back on QE3, as the third and latest round of bond purchases are called, it will not come as a surprise to financial markets, which could soften the impact of tapering. After contradictory statements from Fed members on the direction of monetary policy roiled markets this spring, Bernanke in June made explicit the Fed's expectation that it would start winding down its bond purchases later this year provided the economy continues to rebound. If the recovery were to continue, the program would end altogether in mid-2014.

Although the economy is improving, it is still struggling to break free from the devastating impact of the 2008 financial crisis. Nonfarm payrolls rose 104,000 in July, the fewest in more than a year and down from a previous estimate of 162,000. June job gains were also weaker than previously thought. Monthly payroll gains have averaged 184,000 over the last 12 months, well below the kind of gains needed to return to full employment. Unemployment edged down in August only because fewer people looked for work.

Across the economy, more than 11 million people are unemployed, while there are an additional 7.9 million who want full-time jobs are working part-time. The share of working age adults who are employed, at 63.2 percent, is at its lowest level in decades.

"The bottom line is that today's report paints a picture for the labor market that is not as rosy as most had expected," said Jim Baird, Chief Investment Officer for Plante Moran Financial Advisors, in a note to clients. "Jobs are not being cut perhaps, but they are also not being created at a pace that signals a healthy, robust economy."

At the current rate of job growth, the unemployment rate would not dip below 6 percent -- around the rate that indicates that the economy is running at full throttle -- until 2020, according to the Economic Policy Institute, a Washington think-tank.

Perhaps the biggest factor restraining economic growth: For the better part of two years, Americans have seen negligible growth in their income. Even as more people have returned to work and as home prices have rebounded, median household income has remained essentially flat since late 2011. That limits people's ability to spend, a major drag for a country in which 70 percent of economic activity stems from personal consumption. Consumer spending was flat in July, with disposable income rising a meager 0.1 percent.

"We haven't hit that sweet spot where we have strong growth leading to income growth, which then leads to stronger job growth," said Gus Faucher, senior economist with PNC Financial Services Group, ahead of the government's latest jobs report.

Meanwhile, the decline in the number of people seeking unemployment assistance doesn't presage stronger hiring so much as underline just how much employers have already pared their work forces, said Lance Roberts, chief economist at investment management firm StreetTalk Advisors. "The only reason jobless claims are dropping is because firms have run out of people to fire and lay off," he said.

Another concern is that rising interest rates could trip the housing market as it continues to recover and deter expansion by small businesses, which account for most of the hiring in the U.S. Although Fed officials have said they do not expect to begin raising rates until 2015, a hike in the borrowing costs amounts to monetary tightening for average Americans, Roberts said.

Other threats lurk. President Barack Obama's push to attack Syria has heightened fears of spreading violence in the Middle East, which could raise oil prices. The White House and congressional lawmakers are also preparing to face off this fall over the government's budget and the nation's borrowing limit.

While weaker than many had expected, the economy has recently shown signs of life. TheU.S. Commerce Department late last month revised upward its estimate of second-quarter GDP to 2.5 percent, up from an initial forecast of 1.7 percent. Data out this week shows that hiring among services firms, which employ roughly 90 percent of American workers, has reached its highest level since 2005. And modestly stronger job-creation, coupled with fewer layoffs, has pushed down the jobless rate down from 7.9 percent in January.

In another positive sign, fewer Americans are being forced to apply for unemployment benefits. The four-week moving average for such claims -- a more reliable picture of the state of the job market -- fell to its lowest since October 2007, two months before the economy officially entered the Great Recession.

Editor's note: CBS MoneyWatch initially published an Associated Press story on the employment report, which we have since replaced with this staff-written article. You can find the initial AP report and reader comments here.