There was a big surprise in the national jobs picture last week. The Bureau of Labor Statistics released the monthly Super Bowl of economic indicators, the monthly jobs report, and the economy added 162,000 jobs in August. This was significantly higher than expectations and a definite improvement from the prior month’s 21,000. Manufacturing payrolls showed continued acceleration, adding 16,000 jobs. Construction added another 22,000 jobs, likely helped by the expansion of construction associated with data centers. The largest increase came in food services and drinking places, reversing the negative change of the previous month. Health care and social assistance continued to add jobs. Revisions also showed that June and July payrolls were 55,000 higher.
While the establishment survey component of the report was quite favorable, the household side was even more so. Reversing prior months’ declines, the labor force expanded by 683,000. And many of those entrants to the labor market found jobs, with employment increasing by 569,000. Over the year, both the labor force and employment had been showing weakness. So, the big increase in both was welcome news. More impressive, the labor force participation rate increased by 2/10ths of a point, moving upward from 61.4% to 61.6%.
While the unemployment rate remained flat at 4.1%, there were some noticeable changes in the breakdown by educational attainment. The largest increase was in the high school graduate category, with the unemployment rate increasing from 4% to 4.7%, above the national average of 4.1%. Unemployment among bachelor’s degree holders remained flat at 2.7%. This is not a new development. The unemployment rate for bachelor’s degree holders is consistently about two percentage points lower than for high school graduates, despite all the hoopla about the relevance of a college degree today.
The strong payrolls report became a factor in the upcoming Fed decision. While it was not the ultimate tipping point for a Fed increase, the CPI report released last Friday may have been. Inflation came in hot, with the headline CPI increasing by 4/10ths of a percent in one month. Energy prices, linked to the ongoing Iran War, were a major contributor to the increase. This kept the annual rate of inflation at 3.4%. There was a sliver of good news, and that was with the core rate, which is CPI minus the cost of food and energy. The core continued to decline on a year-over-year basis, moving to 2.4%, closer to the preferred rate of 2%.
The end result is that the Fed will now more than likely increase rates at its next meeting. As happened with the release of the CPI, the equity markets might even reward this Fed increase, as opposed to the usual declines when the Fed is hiking rates. A boost to equities and bonds may result from a Fed signal of its commitment to fighting inflation. Chairman Warsh muddied the waters about his commitment to fight inflation back in July, and a Fed increase this time around will provide a boost to the inflation-fighting hawks and welcome relief to both stock and bond markets.
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