KEY DATA: Payrolls: +201,000; Revisions: -50,000; Private: +204,000; Unemployment Rate: 3.9% (Unchanged); Wages (Month): +0.4%; Over-Year: 2.9%
IN A NUTSHELL: “Job growth remains solid but more importantly, we are finally seeing the tight labor market show up in rising wages.”
WHAT IT MEANS: The labor market is tight but businesses are finding ways to get the workers they need. Job growth in August was solid once again. Indeed, it was slightly above expectations. But before you start saying we shouldn’t listen to economists, keep in mind that the July gain was revised downward by 10,000 and the June increase by 40,000. If you look at the three-month average, which is what I always argue should be done, the economy added 185,000 per month. That is pretty close to what most economists think is likely to be the pattern for a while. With the labor force participation rate not rising and the labor force growing only moderately, it will be hard to replicate the above-200,000 job growth gains we had recently. That was an aberration.
As for the details, there were strong increases in construction, transportation, wholesale trade, health care, restaurants and professional and technical services. Most of those are high-paying industries. However, there were declines in manufacturing, retail (there was a huge decline in clothing stores) and information. The government shed a few workers.
As for the unemployment rate, while it remained at 3.9%, it was just a rounding issue. It was 3.85%. It should be down next month.
But the key number was the average hourly wage, which was up sharply. It needs to keep rising if the inflation-adjusted wage, which is a better measure of purchasing power, is to increase at a decent pace. Inflation is accelerating and that is largely offsetting the wage gains.
MARKETS AND FED POLICY IMPLICATIONS: Has Godot finally arrived? We have been stuck on the bench wondering when, if ever, the strong economy, low unemployment rate and supposed lack of qualified workers would cause wage gains to accelerate. Well, that time may have come. Job growth is probably as good as it can get given the tightness in the labor market. Even the “really stupid” unemployment rate (others call it the “real” unemployment rate) is signaling tightness, dropping to its lowest level since April 2001. The only time it was below the current rate was for about a year and a half at the peak of the dot.com bubble. With the tax cuts and spending increases creating a sugar high, there is little reason to expect labor demand to moderate over the rest of this year or even in the first half of next. The unemployment rate could approach the 3.5% level that was hit only during the Viet Nam and Korean Wars, when many young adults were not in the labor force but in the military. In other words, no matter how you measure it, the reserve army of the unemployed, underemployed, otherwise employed or uninterested in being employed is just not very large. The lack of workers and the accelerating wage gains reinforce the Fed’s belief that it has to continue its rate its normalization process unabated. The next meeting is September 25-26 and a rate hike is as close to a certainty as you can get when talking about the Fed. It is hard to believe that wage and price inflation will decelerate anytime soon, so a December increase and three or four next year are highly likely. Investors are wishing and hoping that does not happen, but they also want strong economic and job growth. They better watch what they wish for as they just may get it, as well as all the issues a strong economy and tight labor markets create.