The U.S. economy unexpectedly shed 4,000 jobs in August, substantially below its previous 100,000-job gain consensus estimate, the U.S. Labor Department announced Friday.
The August decrease represented the first time in four years that the U.S. economy shed jobs, as measured by the monthly statistic, and it provided another datapoint for economists and analysts who argue that the U.S. economy is headed toward a recession. That fact also reinforced the belief among many economists that the U.S. Federal Reserve will cut short-term interest rates by at least 25 basis point, or 1/4 percentage point, at its September meeting later this month.
Further, the consensus in financial circles is that the U.S. economy has slowed substantially, and may in fact have slowed to anemic levels -- full-year GDP growth below 1.5%. The latter conclusion is supported by the fact July's job gain was revised to 68,000 jobs created -- a July gain that is smaller than was previously reported.
Wall Street's initial reaction Friday was not favorable: at mid-day the Dow was down more than 175 points to 13,185; the NASDAQ was down 44 points to 2,569. Meanwhile, the 10-year U.S. Treasury soared on the belief the Fed would cut rates, with the 10-year yield dropping to 4.38%.
For many analysts, August's job statistic represents another economic "highway traffic signal" indicating that economic growth is slowing to near-crawl levels. These analysts point to sluggish consumer spending, the housing sector correction, tightening credit markets prompted by subprime defaults, and an increase in mortgage delinquencies, in general, as ample evidence of (at minimum) a slowing U.S. economy.
Conversely, the economic bulls argue that the U.S. economy, although in slow-growth mode, is nevertheless still growing, that retail sales remain adequate despite elevated energy prices, and that corporate profit growth has held up reasonably well in Q1 and Q2.
Still, while it's rarely empirically sound to form a conclusion about job creation with only one monthly statistic, the totality of monthly job statistics over more than a year reveal a telling point, analysts say: that job growth in the current expansion has been well below trend, and inadequate to meet the U.S. economy's needs. The U.S. economy needs to create about 150,000 jobs per month just to keep unemployment from rising and to accommodate the growth in adults eligible for work, most economists agree.
Further, the changing sentiment regarding the U.S. economy and the prospects for a Fed rate decrease was perhaps best represented by one of Wall Street's most-respected investment banks: Goldman Sachs.
Economists at Goldman Sachs Group Inc. (NYSE: GS) changed its forecast for the next Fed meeting on Sept. 18: Goldman now believes the Fed will reduce its target rate by 50 basis points, or a half percentage point. Goldman had previously predicted a quarter-point cut.
To be sure, the Fed will assess more than just monthly job growth totals when it meets later this month to decide whether or not to lower short-term rates. But, as one economist put it Friday, "The jobs stat does not guarantee a September rate cut, but it does signal that the economy is not performing as well as the Fed would want it."
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