Markets & Finance

Jobs: A Topsy-Turvy August


The August employment report released Sept. 1 reversed the pattern of the June and July reports. After two months of underperformance the headline nonfarm payrolls figures now look stronger, while other key components of the report—especially wage growth— overperformed for two months but now looke weaker.

Nonfarm payrolls rose 128,000 in August after a 121,000 increase in July (revised from 113,000); June's 124,000 increase was revised to 134,000. The unemployment rate fell to 4.7% from 4.8%.

Average hourly earnings edged up only 0.1% in August following an upwardly revised jump in July to 0.5% (it was 0.4%). On a year-over-year basis, earnings are up 3.9%. The revised figure for July was also 3.9% in July (up from 3.8%), and that should be a little disconcerting to the bond market. Hours worked fell to 33.8 from 33.9.

STRAIGHTENING OUT. Manufacturing jobs fell 11,000, while the construction and government categories each clocked increases of 17,000. The household survey component of the report continued to outperform the establishment data despite the unemployment rate "blip" in July, as civilian employment posted a solid 250,000 August increase.

The August release unwound some of the various "twists" in recent reports as payrolls outperformed most forecasts, but the workweek ticked down, with the net result of a moderation in growth for hours worked. The factory sector exhibited a moderation in employment hours via both the workweek and hours worked, which is in contrast to the outperformance of recent months.

And wage growth moderated from the unsustainable recent pace, though the levels of the prior month were bumped higher, and the trajectory remains decisively upward.

PERSONAL INCOME. We at Action Economics now expect a 0.3% rise for industrial production in August, reflecting a rebound in auto assemblies alongside restrained manufacturing. That would mark a reversal of the July mix and mean a robust 5.3% growth trajectory in the third quarter, following the hefty 6.2% pace of the second.

For personal income, we expect a 0.3% August gain that will support growth of 6.1% in disposable income in the third quarter, following 5.7% growth in the second. The August figure is restrained primarily by the lean earnings figure, but also by the drop in the workweek.

MODEST SLOWDOWN. The hours worked index is growing at a 1.1% rate in the third quarter, slightly underperforming the expected 2% spread to our 3.2% GDP estimate for the quarter. The irony for market watchers is the August report is perceived as relatively strong despite the weaker details, while the prior two reports were seen as weak despite strong details.

Overall, the report should function as a reality check for the markets, as the payroll slowdown is largely in line with only a modest slowdown in GDP growth, the workweek surge has been capped, and the component employment statistics point to a gradually moderating trend. This is likely the outcome desired by Federal Reserve policymakers, and we see little reason for the Fed to deviate from its "pause" strategy at its September policy meeting.


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