The August jobs report showed numerous signs of normalization and late-cycle dynamics. There were the higher wages of course, but also slower trend payroll growth, a leveling off of the unemployment rate, and "involuntary" part-time work and other forms of under-employment converging toward already-low unemployment. If we are seeing the labor market re-normalize, that raises a lot of questions about the questions we have been asking about the old models. Maybe they work after all, but what are the right trigger points and what's wrong with how we've been calibrating them? For investors and policy wonks, this all makes Fed Chairman Powell's recent speech about the inherent uncertainty in economic forecasting appear prescient. While the cyclical outlook is center stage in this report, it's worth keeping an eye on the few signs that trade tensions may finally be unnerving some employers.
- Nonfarm payrolls rose by a better-than-expected 201k (so much for the much-anticipated negative surprises in August), but downward revisions to the prior two months brought the 3-month average to 185k from a previously reported 224k.
- The unemployment rate was unchanged at 3.9%, as a slight decrease in the ranks of the unemployed was outweighed by a drop in labor force participation (62.7% vs. 62.9% prior).
- Wage growth hit a new post-recession high of 2.9%.
- Wage growth entering a new phase: It now looks like we have reached a critical mass of factors aligning across tightening labor indicators and rising inflation measures. The August earnings gains were broad-based across industries and the Employment Cost Index for private-industry wages already hit 2.9% in the second quarter. This shifts the risks for wages – and rate hikes – to the upside, but an inflationary spiral seems unlikely in the face of well-anchored inflation expectations and a well-broadcast tightening cycle from the Fed.
- There were two points of concern in industry-specific payrolls. There was weakness in both manufacturing (-3k vs. 18k) and retail (-5.9k vs. 4.1k). There had been some hopes for a rebound after retail's anomalous July reading (weakness concentrated in leisure shops, widely attributed to layoffs at Toys 'R' Us). Weakness in manufacturing was limited to autos, which may be a sign of trade tensions finally taking a toll. The iCIMS Monthly Hiring indicator shows job openings in medium-size manufacturers still rising, so any impacts on employer confidence appear tightly contained for now.
- Against this, there were also a few reassuring details. The diffusion index held up (back up to 60.7 after dipping to a downwardly-revised 59.5), and the healthcare/education sector bounced back and saw an upward revision (53k, up from 41k instead of 22k) -- likely affected by the seasonality of education hiring. There were declines in job losers, teen unemployment, and long-term unemployment, plus rises in job leavers and reentrants. While some may be worried by the decline in labor force participation, retracing the last two months' gains looks more like a reaffirmation of recent sideways movements that anything else. If anything, it reaffirms a sense of normalcy, as the aging-out of Boomers outweighed the new entrants and accessible slack resources.
This is a report that will strengthen the Fed's resolve to hike, including in December. Markets are responding accordingly, pricing out the lower-probability possibility of the Fed skipping a December hike. Many commentators interpreted Chairman Powell’s Jackson Hole speech as dovish, but this employment report will lead them to reappraise that speech’s even-handedness and its emphasis on managing uncertainty and focusing on inflation expectations.