Takeaway: A hot jobs report will put upward pressure on rates today as it slightly increases the odds of a rate hike at the September Fed meeting, but the real deciding factor is next week’s CPI data.
Job creation bounced back in a big way in August, reinforcing a long term trend of reacceleration in the labor market this year.
- 162,000 jobs were created in August vs. 55,000 expected by forecasters and 23,000 jobs lost in July as initially reported. The latest data also show 55,000 more jobs created in June and July than previously reported.
- The unemployment rate stayed low at 4.1%, as expected, though labor force participation increased, so this is actually a decline in unemployment.
- In the same way July’s initially reported data was likely not as bad as the topline indicated, today’s data is also not as good as the headline. July’s data was marred by statistical noise from not adjusting perfectly for teacher employment patterns at the end of the school year. Today’s data includes some large changes that are likely a correction in categories with outsized declines last month, such as teachers and food services.
- Overall, however, today’s reading adds to the narrative that underlying inflationary pressure is building, not letting up. The Bureau of Labor Statistics’ new birth-death model introduced earlier this year has resulted in very volatile month to month readings, making it more important than ever to focus on a trailing average. The six month average hiring rate is now over 100,000 per month, the highest level in two years.
The Fed won’t make their decision based on this jobs report, but it does increase the bar for how low inflation needs to come in at for them to avoid hiking.
- Recent commentary from the Fed has been clear that they’re focused on inflation, not jobs. But today’s jobs data still matters because for any doves that are inclined to vote against hiking based on worries about the labor market, this removes a lot of that concern.
- In other words, the latest commentary from Governors Barr, Waller, and Williams this week indicates that the center of the committee is not quite ready to hike, but could be persuaded to if next week’s CPI data comes in high. This jobs data lowers the threshold for what would be considered “high” because the underlying strength of the labor market appears to be increasing.
