The Employment Report Raises Questions

Nonfarm payrolls rose by 130,000 in the initial estimate for August, less than expected and despite a 25,000 boost from census hiring. For production workers, average hourly earnings advanced by 0.5% (+3.5% y/y). Monthly wage and payroll figures can be choppy, but the underlying trend in job growth is lower. Is that because of labor market constraints (a lack of bodies) or does it reflect a weaker pace of economic growth? The increase in wage growth would suggest that the labor market is tight. Does the Fed then worry more about weaker job growth or higher wage inflation? Policymakers are likely to remain split heading into the September 17-18 Federal Open Market Committee meeting.

Private-sector payrolls rose by 96,000 in August, with a 35,000 net downward revision to June and July. That brought the three-month average to 129,000, significantly lower than last year’s pace (currently reported at +215,000, although annual benchmark revisions, due in February, can be expected to lower that to about +185,000). We need less than 100,000 jobs per month to absorb new entrants into the workforce. The unemployment rate held steady at 3.7%, but labor force participation rose, implying that there is little slack remaining. Average hourly earnings data are notorious quirky. Figures are often revised in the following month. However, the trend is higher, which is what you would expect to see as the job market tightens.

Scott Brown
Click here to enlarge

Much has been made regarding the improvement at the low end of the wage scale (which is coming from a low base, having been restrained in the recession and gradual recovery). In public comments, Fed Chair Powell has indicated that he was particularly struck by what that means for the communities that were largely bypassed by the economic recovery. The labor market is the widest channel for inflation pressure and the Fed has historically looked to wage pressures as a key guide to Fed policy. That may be changing, although many Fed officials will point to the wage data in suggesting a need for less accommodative policy.

The August ISM surveys were mixed. The manufacturing data were weaker than expected, with the headline figure, new orders, production, and employment each moving below the breakeven level (50). The financial press reported that “manufacturing is in a contraction,” but that was already apparent. The ISM figure is a diffusion index, which doesn’t measure actual activity, but is a signal of the general direction (in this case, lower). The Federal Reserve’s index of manufacturing output peaked in December and fell 1.6% in the first seven months of the year. In contrast, the non-manufacturing index was stronger than expected, consistent with moderate growth in the overall economy.