Not-So-August Report Fails to Shake Faith in U.S. Labor Market

  • Month’s jobs figure missed estimates a seventh straight time
  • Bigger picture is healthy, may support Fed tightening

Cohn Says White House Is Concerned About U.S. Wages

The August employment report may have been almost predictably disappointing, though it wasn’t weak enough to call into question the underlying strength of the U.S. labor market.

The data marked the seventh straight August that the government’s initial take on payrolls fell short of the median estimate of economists, with 156,000 jobs added compared to a projection of 180,000 in a Bloomberg survey. Yet the bigger picture shows a still-healthy labor market in a mature expansion. One bright spot in the report was a surge in manufacturing and construction employment.

Economists were also quick to point out the difficulty adjusting the August data because of differing start times of the new school year and swings in summer employment. What’s more, the monthly figures have been revised higher in five of the past six years.

“There’s a lot of statistical quirks embedded in here -- nothing fundamental,” said James Smith, a developed markets economist at ING Bank NV. “It’s a slow-moving ship and we’re still optimistic that wage growth will pick up in the coming months given the strength in the labor market.”

Highlights of Employment (August)

  • Nonfarm payrolls rose 156k (est. 180k); June-July revisions subtracted 41k jobs
  • Unemployment rate, derived from separate survey of households, rose to 4.4% (est. 4.3%)
  • Average hourly earnings rose 0.1% m/m (est. 0.2% gain); up 2.5% y/y (est. 2.6%)

Even so, August’s report will probably be the most reliable picture of underlying employment trends for several months, as Hurricane Harvey’s fallout in the Houston region begins to affect the data. While the storm may depress payrolls at first, jobs will probably get a subsequent boost as construction and utility workers help rebuild housing and infrastructure. The Labor Department said in its release that Harvey “had no discernable effect” on the August report.

Read more: BI Economics’s analysis of the U.S. employment report

Gary Cohn, President Donald Trump’s top economic adviser, said Harvey would affect economic data for several months and make it much harder for officials to get the “bigger picture” of what’s going on in the economy.

“The economic data that we’ve just gotten -- this unemployment data -- is probably the last set of clean unemployment data we’re going to have for many, many months as we go through the recovery process,” he said in an interview on Bloomberg Television.

Upbeat Consumers

Other data on Friday were more encouraging for the economy. The University of Michigan’s consumer sentiment survey showed Americans in the first eight months of this year have been more upbeat than at any comparable period since 2000. Households are growing increasingly optimistic about employment and the economic outlook, a positive sign for spending.

“Despite an underwhelming jobs report, the bigger picture is that the U.S. labor market remains quite healthy at this late stage of the cycle, with little sign of generating the kind of wage pressures that would risk derailing the expansion,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said in a note.

In turn, the steady increases in demand are powering growth in manufacturing. U.S. factories ramped up in August at the fastest pace in six years, driven by employment gains, figures from the Institute for Supply Management showed Friday. The ISM’s data were corroborated by the Labor Department’s figures on manufacturing payrolls, which increased 36,000 last month, matching the largest advance since March 2012.

Wages Lag

Yet the tightening of the labor market still isn’t leading to a build-up in wages. Average hourly earnings climbed less than forecast in August, rising 0.1 percent on a monthly basis. The median projection was for a 0.2 percent gain.

The nation’s jobless rate climbed to 4.4 percent last month from 4.3 percent in July, while the labor-force participation rate held at 62.9 percent.

Paul Richards, Medley Global Advisors president, and Greg Daco of Oxford Economics discuss the jobs report.

Source: Bloomberg

The jobs numbers probably won’t be enough to change the Federal Reserve’s outlook for moderate economic growth and slowly increasing inflation because other data remain firm. Investors expect this will encourage policy makers to announce the start of the gradual process of shrinking their $4.5 trillion balance sheet when they meet later this month, and to keep their options open for another interest-rate increase before the end of the year.

“We believe the data remain more than strong for Fed officials to announce the start of the balance sheet normalization process at this month’s meeting,” High Frequency Economics Chief U.S. Economist Jim O’Sullivan said in a note. “We still expect a rate hike in December as well, although that will depend on the inflation data showing more strength in the next few months than in the last few months.”

— With assistance by Sho Chandra

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