Federal Reserve should hike rates despite weak jobs report

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The employment situation in the US was disappointing in May — and that may make the Federal Reserve think twice about raising interest rates when it meets next week.

But the Fed should raise rates anyway.

Why? Because like a number of other times that Fed Chair Janet Yellen balked on hikes, this may be the last opportunity in a while to do so when an increase borrowing costs can be justified.

Last Friday, the Labor Department announced a modest increase of 138,000 jobs in the US during May. That was far below the 185,000 that experts were expecting.

Even worse, the government revised downward the surprisingly strong job gains in April to an ordinary amount of just 174,000. And March’s gains were lowered to a pathetic 50,000.

Take the last three months together and the average gain was just 121,000 jobs.

That’s extremely disappointing, but it is in line with other weak economic data that has been coming out of late. And when you put the economy’s overall performance during April and May together with the measly 1.2 percent annual growth in the first quarter, you have a troubling situation for the Fed and other policymakers.

So there is very good reason interest rates shouldn’t be raised next week — except that they have to be.

First, let me show you what the Fed is really dealing with. Job growth in May — that 138,000 figure — was really deceiving.

As I’ve explained many times before, Labor includes a very optimistic guesstimate in its May numbers. So actual growth really wasn’t 138,000, and that figure will probably have to be adjusted lower in the same way that those of March and April were.

Friday’s figure of 138,000 included a very generous guess that 230,000 jobs were created by small, newly born companies that Labor can’t — for reasons unknown — capture in its surveys.

Those 230,000 jobs are before seasonal adjustments. So it isn’t like you can simply subtract 230,000 from the headline number of 185,000 after seasonal adjustment and conclude that there were jobs lost in May.

That 230,000 job guesstimate might only equal 30,000 jobs after it is seasonally adjusted. I’m guessing at this because Labor has never been able to provide me with an actual number for this calculation.

Still, subtract a seasonally adjusted 30,000 guesstimated jobs (or whatever number you choose to use) from the announced figure of 138,000 new jobs in May, and you get a truly awful month.

If May’s seasonal adjustment had been the same as the one used by Labor in May 2016, then the announced employment figure last Friday would have been lower by 43,000.

In other words, May’s gains would have been only 95,000 jobs if Labor’s seasonal adjustments haven’t changed. And a number that low would have been very troubling.

Let me show you what was done to Labor’s seasonally adjusted figures. For this you have to compare the seasonally adjusted and non-seasonally adjusted figures for both May 2016 and May 2017.

On a non-seasonally adjusted basis, there were 144.525 million jobs in the US in May 2016. That was seasonally adjusted down to 143.869 million.

Do the math and you’ll see that Labor subtracted 656,000 jobs from the raw, non-seasonally adjusted data to get to the seasonally adjusted figure.

May is May, whether it’s in 2016 or 2017. So the seasonal adjustment should be almost the same. But it wasn’t in last Friday’s figure.

The raw, non-seasonally adjusted data for May 2017 showed there were 146.748 million jobs in the US. Only 613,000 jobs were removed to get the number down to the seasonally adjusted figure of 146.135 million.

Had Labor used the same 2016 seasonal adjustment in May 2017 and removed 656,000 jobs (instead of 613,000) the number released last Friday would have been 43,000 jobs lower.

Last Friday’s figure for May would have been a gain of only 95,000 jobs (43,000 subtracted from the 138,000 jobs that were announced.)

Bottom line: The Fed will be considering an interest rate hike at a time when misleading statistics are making the weak employment situation look a lot better than it really is.

The Fed can, and probably will, ignore all the messiness of last Friday’s numbers.

So why do I think the Fed still needs to raise rates, even with the announcement of a weak employment situation and all the shenanigans that went into making that number look at good as it did?

Because the job figures probably aren’t going to look any better this summer. And so there will probably be less opportunity to raise rates over the next six months.

Why raise rates at all? Because the Fed’s extremely low rate policy is hurting millions of savers in the US and creating a bubble in the stock market that is drawing in more and more people who shouldn’t risk their wealth in equities.

And if the Fed doesn’t raise rates soon, then it won’t be able to cut them when the economy really weakens and folks turn to Yellen — or her replacement — to ride to the rescue.

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