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Modest jobs report won’t necessarily deter Fed

When the Labor Department said the U.S. economy added 151,000 jobs in August – an average result, though below economists’ expectations – the reaction, especially from financial markets, was that we know one thing: The Federal Reserve won’t raise interest rates at its meeting this month.

When the Labor Department said the U.S. economy added 151,000 jobs in August – an average result, though below economists’ expectations – the reaction, especially from financial markets, was that we know one thing: The Federal Reserve won’t raise interest rates at its meeting this month.

But how certain can we be? Fortune magazine noted three things about the “disappointing” August jobs report that could complicate the Fed’s decision:

Fortune said the economy created more jobs in August than it did in the same month last year and that retailers added 15,000 employees and restaurants added 34,000 as both industries showed confidence in the consumer. Separately, the oil industry added jobs (albeit only 800) for the first time in more than a year.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said in a speech Friday after the jobs report that the economy might need much higher interest rates.

Lacker is not a member this year of the Federal Open Market Committee, the Fed’s rate-setting panel, but he does participate in rate discussions, Reuters said.

He said the job market is continuing to strengthen and that the argument for higher rates will just grow stronger unless job growth slows quite a bit in the months ahead.

"The way the data is playing out, I think the longer we wait there is a material increase in risks that we run," Lacker told reporters after his speech.

Most of the other important U.S. economic data last week reflected a growing economy. Personal income for July was up 0.4 percent and consumer spending was up 0.3 percent; inflation remained tame.

The Conference Board’s Consumer Confidence Index surged above 100 to 101.1 for August, the highest reading it has had since September of last year.

Contrarily, though, a day ahead of the jobs report came the news that U.S. auto sales fell in August. General Motors and Ford reported declines, although sales at Fiat Chrysler were up from the same month a year earlier. Industry sales have been growing for six years.

The New York Times said sales remain healthy in comparison to 2009 during the Great Recession, when 10.4 million were sold, although analysts now wonder whether sales this year will rise to last year’s record 17.4 million.

“We don’t see the industry taking a huge dip, and this is still a high level of sales,” Michelle Krebs, an analyst at car-shopping site, told the Times. “The big question is how each automaker is going to react to slower demand.”

Many consumers who needed a car bought one during the past few years after they found new jobs.

“We don’t have a lot of pent-up demand now like we did coming out of the economic crisis,” Bryan Bezold, an economist for Ford, told the Times.

Economy watchers won’t see a lot of new data during this holiday-shortened week. The most important piece will be the Fed’s beige book report on current economic conditions, which will be out Wednesday afternoon. It always precedes meetings of the central bank’s rate-setting committee.

The Fed’s most recent beige book, from mid-July, said the economy was expanding modestly through the end of June. Pressure from inflation was seen as slight. Consumer spending "was generally positive, but [showed] some signs of softening," U.S. News & World Report said.

Does that sound familiar?

The Wall Street Journal reports that Goldman Sachs has raised the odds of an interest-rate hike to 55 percent from 40 percent because of the August jobs report.

The Journal said economists it polled estimate that the Institute for Supply Management’s nonmanufacturing index, which is due out today, was 55.0 in August, down slightly from 55.5 in July.

The index is a measure of commerce that covers retail trade, construction and services that include health care. When it’s above 50, which it has been for 78 months, it signals expansion.

The ISM’s manufacturing index fell to 49.4 – a reading that signals a decline in that sector -- for August in a report the institute released last week

“While the payrolls report will be the marquee swing factor for the Fed, they will certainly take notice of this report, given the impressive track record of the ISM in predicting the tone of economic activity,” MarketWatch said Millan Mulraine, deputy chief U.S. macro strategist at TD Securities, said in a note to clients.

The Fed’s rate-setting panel will meet Sept. 20-21 and chairman Janet Yellen will hold a press conference afterward. It’s their move.



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