See Ya, September
Friday, Sep 02, 2016

The August jobs report was a mild disappointment relative to economists’ forecasts but an upside surprise for anyone looking to get an early start on their Labor Day weekend. This report affirmed the conventional wisdom: headline job growth remains steady but has slowed since last year, some measures of slack – notably wages and underemployment – remain stubbornly elevated, and the Fed is unlikely to raise rates later this month. Indeed, the Fed is likely to remain on hold through the presidential election in November. What’s interesting in this report, then, are not the broad brush strokes, but what the details mean for the next few months.

Nonfarm payroll growth of 151,000 was only modestly below average economists’ forecasts for about 180,000. The net revisions to the prior two months nearly canceled each other out, but the August figure was much higher than May’s disconcerting but anomalous 24,000, so the 3-month moving average rose to 232,000 from the 190,000 reported last month.

In another affirmation of the status quo, service-providing industries offset weakness in goods-producing industries. The latter group saw weakness across almost all major categories. Mining and logging extended its weak streak (-4,000 following -6,000 and -7,000), while manufacturing dipped into the red again (-14,000 after adding 6,000 in July), consistent with weak manufacturing survey results in August. Among service providing industries, there were a few notable exceptions to the moderating downshift: job growth accelerated in information (4,000 versus -4,000) and in retail trade (15,100 versus 11,100), in line with strong recent consumer spending data. Overall, the breadth of job gains moderated but remained healthy, with the diffusion index falling to 58.0 from 62.4.

That said, there were two concerning developments in the establishment survey. One was the loss of jobs in temporary help services (-3,100 versus 12,500), a category that is seen as a leading indicator of job growth. The other was a tick down in average weekly hours, to 34.3 from 34.4 (itself downwardly revised from 34.5). More people are working, but how much they are working and earning remains in question – an issue evident in the household survey as well.

In the household survey, the unemployment rate held steady at 4.9%, but unrounded it backed up to 4.922% from 4.878% as the rise in the ranks of the unemployed outpaced the rise in the labor force. Labor force participation held steady at 62.8%. The number of people who were forced to settle for part-time work rose over 100,000 to 6.1 million from 5.9 million, but a decline in marginally attached workers offset this, leaving the underemployment rate unchanged at 9.7%.

Wage growth slowed, but some economists had anticipated this would occur due to a calendar quirk, bringing down the year-on-year growth rate to 2.4% from 2.6% as originally reported for July. This effect is likely to reverse in coming months, returning wage growth to the upper end of its recent range as job growth continues above the estimated 70,000-100,000 needed to absorb new workers entering the labor market.

Given the lack of urgency in recent Fed communications, the bar was relatively high to overturn the consensus view that the Fed will remain on hold in September. This jobs report needed to keep pace with the last two months’ and sound alarms for an overheating economy in order. Instead, it reaffirmed the notion that job growth is gradually slowing, wages remain tame, and the Fed can take its time. Prior to this report, financial market prices implied a 76% probability that the Fed would not hike in September and after the release, that probability rose to about 80%. In contrast, the market-implied probability for a December hike barely budged, remaining around 55%. That should be high enough that the Fed would feel comfortable raising rates, as long as the economic data provide a plausible basis for hiking.

about the author

As chief economist at iCIMS, an industry-leading provider of talent acquisition software, Josh Wright leads a team of data scientists in analyzing emerging trends in the U.S. labor market