This Chart Shows The Real Problem With The August Jobs Report

When you look at non-farm payroll growth on a 12-month average basis, you lose the month-to-month noise, and you see that the job situation has been basically unchanged for the last 30 months: Adding jobs at a pace of about 2 million per year. August's disappointing report doesn't materially change that.

The problem with the August report isn't that it was bad; it's that it wasn't good. For the past few months, it had looked like the job situation was maybe getting better, with the pace of job growth speeding up to around 2.5 million a year. Now it's becoming clear that we haven't broken out of the funk.

The key question is, can we expect this pattern to change? Is there reason to expect the pace of job growth to improve soon, so that labor force participation can start increasing again?

There are a couple of reasons for optimism, but they are fully offset by reasons for pessimism.

Reasons for optimism:

1. The end of public sector job losses. As Bill McBride noted this weekend, private sector job growth during the Obama Administration has not been that bad. We've actually added more private sector jobs during Barack Obama's presidency than we had at the same point in George W. Bush's presidency. But job losses in the public sector have been a major drag, both through the direct effect of layoffs and hiring freezes and the negative ripple effects those job losses have through the private economy. State and local governments are finally enjoying revenue growth and adding employees again; the effect of sequestration on federal employment should be largely complete by the end of the year. In 2014, public sector employment should be growing again, which will improve the overall job growth pace.
2. The inevitable return of housing. Historically, about 1.5 million new homes are built every year in the U.S. Construction has picked up from a pace of 500,000 units per year in the depth of the recession but only to a level around 900,000. The population is still growing and we're going to need more houses sooner or later. When housing eventually recovers in full, that will boost job growth.

Reasons for pessimism:

1. The Fed. It's remarkable that we managed even tepid job growth since 2011, despite steep cuts in state and local government payrolls, flirtation with the debt ceiling, the end of the payroll tax cut, an increase in top income and capital gains tax rates, and sequestration. We owe a lot of thanks to the Federal Reserve, which has eased aggressively to offset fiscal tightening and dysfunction. The flip side is that, as things get better, the Fed is signalling that it will pull back. It seems as though Fed officials have decided that a job growth pace around 2 million is about right, and they will ease or tighten as necessary to maintain it. So, improvements on the above two dimensions may simply be offset by Fed action. Appointment of Larry Summers, a Quantitative Easing skeptic, will exacerbate this problem; as BNP Paribas economists noted last month, increasingly credible rumors of a Summers appointment caused a 0.30 point rise in 10-year Treasury bond rates, reflecting that the markets expect tighter money under a Summers Fed than a Yellen Fed.
2. The risk of more fiscal dysfunction. While we've probably come to the end of fiscal drag, there could be more in store if Republicans succeed in getting more austerity measures as part of agreements to keep the government open and raise the debt ceiling this fall.

So, that's depressing: The long jobs drought isn't ending and it's not clear that it's going to end anytime soon. But there is at least one thing the White House can do to quickly improve the outlook: nominate Janet Yellen to lead the Fed.