Jobs Number Down -- Will Fed Pause?

Aug. 4, 2006 — -- As if lazy August Fridays weren't enough for the vacationing Wall Street and financial communities, today's jobs report was a gift. The lower-than-expected 113,000 new jobs added during July has been interpreted as a clarion call for the Federal Reserve to end its two-year-plus interest rate hike stint.

You only have to look at the green arrows on the futures market for proof that the Street is celebrating the weaker-than-expected jobs report. Most economists had expected employers to add 145,000 workers to their payrolls during July (conveniently, the monthly average for the year). They also expected a steady unemployment rate. Instead, we're seeing slower jobs growth and a slight uptick in the unemployment rate to 4.8 percent, up from 4.6 percent in June and a five-month high.

This is a good indication that the economy is slowing -- exactly what the Fed has been pushing for. It's been raising rates to slow the American consumer down, take some of the heat out of the housing market and, it's hoped, keep prices from shooting through the roof.

Traders are now betting for a pause in the rate hikes at next week's (Aug. 8) Fed meeting.

Basically, this is a bad-news-is-good-news scenario. The stock market will probably rally today in anticipation of the long-awaited interest rate pause next week.

But the Fed has perhaps gone too far in its engineered slowdown. Historically, the central bank tends to overshoot when it comes to putting the brakes on, and some economists believe that we might see a recession by the end of 2006 or early 2007, thanks to the 17 quarter-point rate hikes since June 2004. Only time will tell.

The increase in the rate of unemployment will be largely overlooked. It's within the survey's margin of error, and still low by historic standards.

As has been the trend during the most recent economic expansion, service industries are some of the fastest growing.

Computer systems designers (+12,000), architects and engineers (+10,000), and management consultants (+6,000) all found easy job hunting last month. Health care workers (+23,000) have had a great job market for years now. And folks looking for work in the nation's restaurants and bars (+29,000) didn't need to look too far to get a new job during July.

People in manufacturing (-15,000), transportation equipment (-9,000), electronic equipment (-8,000) and textile mills (-2,000) all found a less-than-favorable market.

So how much does this matter? It's important. The jobs report is arguably one of the best economic indicators out there -- and it's easy to understand why.

Definition: The nonfarm payrolls number is a measure of the number of new jobs created by the private sector during the month. It is based on a survey of about 160,000 businesses and government agencies. The national unemployment rate comes from a separate survey of households.