Jobs report shows weak August numbers. Will Fed 'ease' the way?

The pace of US job creation was disappointingly slow in August, signaling a recovery that is still weak and fragile as a pivotal election draws close. Will the Fed maintain low interest rates?

The pace of US job creation was disappointingly slow in August, signaling a recovery that is still weak and fragile as a pivotal election draws close.

Employers added 96,000 jobs during the month, following gains of 141,000 in July and 45,000 in June. The August figure, reported by the Labor Department Friday, also showed little change from August 2011's number.

The unemployment rate continued to hover near the level where it's been in recent months, edging down to 8.1 percent.

"Jobs growth was anemic, and even the drop in the unemployment rate was bad news because it happened for the 'wrong' reason, a declining labor force rather than rising employment," Nigel Gault, chief US economist at IHS Global Insight, wrote in an analysis of the August numbers. "Today's weak report should seal the deal for more easing from the Fed on September 13."

The labor force, the number of people either working or actively seeking work, declined by 368,000 for the month.

Mr. Gault said he expects the Federal Reserve to extend the duration of its pledge to maintain low interest rates, from 2014 into mid-2015, and to launch a "QE3" program of bond purchases, focused on mortgage-backed securities worth $500 billion to 600 billion. The nickname for the asset purchase program stands for "quantitative easing," round 3.

Prior "QE" rounds have come as the Fed has sought ways to spur growth at a time when it has already reduced short-term borrowing costs for banks to about zero percent.

While Fed Chairman Ben Bernanke has recently called tepid job growth a "grave concern," economists differ on whether a QE3 program will have much stimulative effect. Supporters say it could reduce already-low long-term interest rates, helping to spur housing-market activity among other things, and that it could have a modest positive effect on stock prices.

Skeptics say what would really boost the economy is help the Fed can't give – including better fiscal policy on government spending and taxes. That could give businesses confidence that an economic expansion will continue, thus making the case for new investment and hiring.

The tepid job figures come with the election just two months away, and the numbers mesh with campaign arguments already being emphasized in the presidential campaign.

President Obama is urging voters to stick with him, to be patient, and that better times will come soon. He argues that his opponent's policies will put the economy on a worse track.

Republican challenger Mitt Romney is arguing that the economy isn't performing nearly well enough, given that the financial crisis ended early in Obama's first term, and that a new approach is needed to fuel growth.

For now, the two are locked in a close battle, judging by recent polls.

A vital question, to be resolved in coming months, is the "fiscal cliff" of expiring tax cuts at the end of the year. If Congress and the White House can't agree on some bargain, a scheduled rise in tax rates could hit consumer pocketbooks and business confidence. 

Both Democrats and Republicans are saying this wouldn't be good for the economy, and forecasters generally expect some deal soon after the November vote to avert a sudden downshift in the economy. But for now the two sides seem more focused on how to win the elections than on finding a compromise.

Also at stake in the election is the longer-term course of fiscal policy: Whether to tame federal deficits more by spending cuts or tax hikes.