By Michael Englund and Rick MacDonald If you heard what sounded like a loud exhalation on the morning of Sept. 3, it may have come from Federal Reserve policymakers and Bush campaign operatives alike. The cause? A solid employment report for August. After two months of below-trend job growth, nonfarm payrolls rose 144,000 in August, not too far off the Wall Street median forecast of 150,000.
And while the headline number was more or less in line with expectations, the report contained a pleasant surprise: upward revisions to the payrolls data for the two previous months. July's total was updated to a 73,000 gain, from 32,000 previously, while the June figure was raised to 96,000 from 78,000.
Overall, the August data, combined with general upward revisions to previous months, left a much stronger trend than what appeared to be the case with the back-to-back disappointments in June and July. The latest data support our outlook at Action Economics for healthy job growth through the second half of the year (see BW Online, 9/1/04, "A Late Summer Lift for Jobs?").
STEADY WORKWEEK. Elsewhere in the August report, the unemployment rate dropped to 5.4%, vs. the median forecast of 5.5% -- the lowest level since October, 2001, before the effects of the September 11 terrorist attacks began to push the jobless rate higher. Hourly earnings rose 0.3%, vs. a median forecast of 0.2%.
The average workweek was unchanged from an upwardly revised level in July of 33.8 hours (median 33.7 hours). The workweek data now exhibit more of the pattern we expected, as the upward bump in the July workweek to 33.8 makes the surprisingly low 33.6 reading for June look more like the "Reagan effect" -- data distortions caused by the former President's funeral. This made the economic data for June and July look considerably weaker than they now appear after most of the various economic reports for those months have been revised higher.
The August report showed improvement in key labor-market sectors. Not only did the factory figures bounce back to more healthy levels -- with manufacturing adding 22,000 jobs -- but June and July data were also revised higher. The only industry to decline in August was retail, likely reflecting the poor back-to-school sales season that chain stores warned about on Sept. 2.
HIGHER YIELDS. We continue to project a growth trend in nonfarm payrolls for the remainder of the year that's close to the 180,000 average monthly gain now reported for the first eight months. With the August data, it now appears more apparent that the reports for the March-May period simply overstated employment strength, while the June-July reports understated it.
The broad sweep of the employment picture now appears closer to economists' expectations, and the bond market responded in kind: The yield on the 10-year note jumped to 4.25% from around 4.18%. Implied yields on Fed funds futures, a trading vehicle for market pros to bet on the future direction of rates, jumped on the data. The October contract is now basically fully priced for a 1.75% Fed funds target rate.
The report gave dollar a moderate boost, apparently from the modest upward revisions in the June and July reports. Stocks were unable to get a bounce from the report as a weak outlook from chip giant Intel (INTC) weighed on sentiment, particularly heavily on the Nasdaq composite early Friday.
STRONGER CASE. And what of Alan Greenspan & Co.? The month's data and the back revisions vindicate the central bank's more optimistic outlook, even though some pundits would like to see even stronger payroll gains. This report certainly keeps policymakers on track to raise rates another quarter-point at their Sept. 21 meeting. And as the Fed's goal is to get back to a more neutral funds rate, at Action Economics we'll maintain our outlook for quarter-point hikes in November and December as well.
But before the upcoming FOMC gathering, the Fed chief will have a chance to comment on the employment outlook as he delivers testimony to the House Budget Committee on Sept. 8. The August jobs report should leave him with a stronger case for the optimistic outlook he's likely to present to lawmakers. Englund is chief economist, and MacDonald director of investment research and analysis, for Action Economics