U.S. August Employment Bounces Back

Highlights:

• August payroll employment bounced back to 201k following downwardly revised gains in July of 147k (157k previously) and in June of 208k (248k). Market expectations had been for a 193k increase.
• The increase in employment was skewed towards private sector service-producing jobs which increased 178k up from the 117k gain in July.
• The separate, and more volatile, household survey indicated employment plummeting 423k following the 389k jump in July. With labour force also slumping 469k, the unemployment rate remained unchanged at 3.9%.
• The annual increase in wages jumped more than expected to 2.9% in August from 2.7% in July.

Our Take:

Today’s employment for August indicated a solid rebound in hiring to 201k after the smaller-than-expected 147k gain in July. Thus despite indications of the economy operating beyond capacity, and thus a shrinking pool of available workers to draw from, hiring remains surprisingly robust. Though the unemployment rate remained unchanged at 3.9%, it remains significantly below the Fed’s long-run expected range for unemployment of between 4.3% and 4.6%. The drop in the broader measure of unemployment, the so-called U-6 rate, to 7.4% from 7.5% provides some evidence that solid U.S. growth is drawing more individuals back into the labour force. The strength in labour markets contributed to the wage measure rising significantly to 2.9% in August from 2.7% in July. The upward trend in wage growth has generally tracked the downward trend in the unemployment rate through all of the growth phase of the current business cycle. The pace of increase in wage growth does not as yet jeopardize the Fed’s 2% inflation target. However, the risk grows as this measure continues to trend higher and is thus expected to keep the Fed tightening policy. Our forecast assumes that the current fed funds range of 1.75% to 2.00% will rise a further 50 basis points by the end of this year and a further 100 basis points through 2019. The next hike is expected later this month at the September 25-26 policy-setting FOMC meeting.