The Case Against Tapering in September

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Last month on jobs day, I wrote in this space about an economy stuck in second gear.  On this month’s jobs day, I’d like to reiterate that point but add a question, one aimed at the folks across town at the Federal Reserve:

Do you really want to make a car that’s puttering along in second gear climb a hill?  Because that’s, I fear, what you’d be doing if you proceed with your plans to taper this month.

Let me be clear.  This was not a disastrous jobs report.  The top-line payroll number â€" 169,000 â€" wasn’t that far off expectations (and, in fact, as I forecast 170,000, it’s about where I thought it would be).  But there were pretty large negative revisions to prior months’ data: July’s already subpar 162,000 jobs was revised way down to only 104,000.  June’s revisions subtracted another 16,000.

Also, in a clear sign of weak labor demand, the share of folks participating in the job market â€" working or looking for work â€" continued its slide and fell to its lowest rate since the late 1970s.  Some analysts want to write that off as a function of demographic change: our aging work force.  But that’s a minor part of the story â€" the reason the unemployment rate fell last month, from 7.4 percent to 7.3 percent, was not because more people got jobs.  It was because more people gave up looking for them.

Now, also consider this: over the last couple of months, longer-term interest rates, say those on 30-year fixed rate mortgages or the yields on 10-year government T-bills, went up a full percentage point. That, too, isn’t a disaster. In fact, it’s in part a signal that the economy is improving and bond investors want a bit more of a premium if they’re going to lock up their money.

But much of that increase is because of monetary policy, in particular the Fed’s suggestion that it very well might begin to taper off its $85 billion-a-month bond purchases at its meeting later this month. With the Fed decreasing its demand for bonds, their prices pull back as their yields rise.

And then there’s the other thing the Fed has told everyone: these decisions are going to be data driven.  Mr. Bernanke and the vice chairwoman, Janet Yellen, have been particularly clear about factoring the health of the job market into their decisions.

Well, the job market is not getting healthier. I’m not reading too much into this one month’s data â€" I’m talking about trends, like the participation rate mentioned above. Or the fact that if you average the job gains over the past three months, you get 148,000. That would be enough to stabilize the unemployment rate at its elevated level above 7 percent, were it not for the shrinking labor force. It’s not nearly a pace of job growth that would consistently nudge the rate down, such that we might actually create a bit of bargaining power for lower-wage workers, who are seeing almost none of the gains in macroeconomic growth.

So, if they’re really data driven, Fed officials will drive away from a September taper. I can’t speak for Wall Street, but that’s the best move for Main Street.