Jobs, Wages, Unemployment Rate Good Enough? Yes for Us

Employment conditions improved enough in August to evidence “some” improvement with nonfarm given the upward revisions in jobs, better aggregate hours, lower unemployment rate and rising wages.

Employment Conditions Show Some Additional Improvement

Analyzing the broad sweep of the jobs report, “some” improvement in the labor market is our conclusion. Nonfarm employment rose just 173,000 in August but the prior two months were revised upward by 44,000 jobs in total. In addition, August has a history of a lower initial estimate for jobs, and we expect that this pattern will be repeated again. These observations, plus the data reviewed below, meets the Fed’s requirement for some additional improvement in the labor market. This keeps the Fed on course to begin to lift short-term interest rates in September.

Job gains during August were broadly based as indicated in the top graph. For August, the manufacturing sector showed a decline in jobs and this could be a result of weaker export growth. Over the past three months, nonfarm employment is up 221,000 on average with solid gains in trade, retail, business services, education & health and leisure & hospitality.

Hours Worked and Average Weekly Hours Improved

The index of hours worked has risen 2.9 percent over the past three months (middle graph), which would support a view that domestic production is on track for a solid gain—we have industrial production at 3.2 percent in the third quarter. The average workweek also rose by 0.1 hour during the month to 34.6 hours. Changes in hours are a good leading indicator for employment growth and also address one of the greatest areas of slack in the economy, which is the unusually large pool of part-time workers.

The big jump in hours worked also gets the third quarter off to a strong start from an output standpoint. Hours worked plus trend productivity is generally a good proxy for real GDP growth.

Unemployment and Wages: A Tighter Labor Market

The unemployment rate fell for the general labor market to 5.1 percent while unemployment rates for both adult men and adult women fell. Meanwhile, wage growth is at 2.2 percent year over year. Compared to a year-ago, wages are up for both goods and service producing sectors. Higher wages would support Vice-Chair Fischer’s view that the path of inflation is likely upward and will approach the Federal Open Market Committee’s (FOMC) two percent target.

For FOMC actions in September the projection of inflation, not the current pace of inflation, remains the focus of policy. From the FOMC’s view, current low inflation is discounted due to temporary conditions. We cannot know their projections. However, we know that their model is the Phillips curve and for now we are getting a lower unemployment rate and higher inflation—consistent with the current conditions in the labor market. Therefore, we expect the FOMC to raise rates in September.