According to a report released by the U.S. Bureau of Labor Statistics on September 4 (Friday), the non-farm payroll employment in August increased by 162,000, exceeding expectations. This alleviated concerns about a deteriorating job market and provided the Federal Reserve with more flexibility to consider raising interest rates at its September meeting to continue addressing inflation.
The increase of 162,000 in non-farm payroll employment in the United States far exceeded the market’s expectation of 55,000. Additionally, the unexpected rise in labor force participation indicates that the job market’s resilience is much stronger than previously thought.
The market reacted swiftly to the news, with the U.S. dollar index surging, long-term Treasury yields spiking, and stock index futures plummeting. Traders are recalibrating their positions, and federal funds futures now show a probability of over 60% for a Fed rate hike in September.
The strong impact of the August non-farm payroll data on the market is partly due to the pessimistic expectations leading up to the release. Bloomberg’s survey projected an addition of 55,000 jobs, while The Wall Street Journal forecasted 53,000 jobs. Some research institutions’ models based on high-frequency data also pointed to a disappointing outcome.
The report from the U.S. Bureau of Labor Statistics showed that the unemployment rate remained steady at 4.1%, in line with expectations, with approximately 7 million unemployed individuals.
Wages and working hours also displayed strength. Average hourly earnings in August increased by 0.3% month-over-month and 3.1% year-over-year, slightly above the market’s expectation of 3.0% annual growth. The average weekly hours worked also increased by 0.1 hours, reaching 34.4 hours.
The labor force participation rate rose from 61.4% to 61.6%, with the employment-population ratio reaching 59.1%. This indicates that the stable unemployment rate is not solely due to more people exiting the labor force.
The report also revised previously soft job data. July’s non-farm payroll employment was revised from a decrease of 23,000 to an increase of 21,000, and June’s figures were revised from an addition of 20,000 to 31,000, totaling an upward revision of 55,000 over the two months.
Another significant change highlighted in the report is the slowdown in wage growth to its lowest level in five years. Despite a 0.3% month-over-month increase in average hourly earnings in August, the 3.1% year-over-year growth falls below the current inflation level of about 3.5%. Although nominal wages are rising slightly, they are not keeping pace with the latest price increases, putting pressure on workers’ real purchasing power.
The report reflects a divided labor market, with robust job gains indicating that the labor market is not losing steam, while the continued decline in year-over-year wage growth suggests that the pressure on companies to compete for employees and raise wages is diminishing.
For the Federal Reserve, the former creates room for raising interest rates, while the latter indicates that the inflation risk driven by wages is not escalating at the same pace.
The Federal Reserve is set to hold its interest rate meeting on September 15-16. Prior market expectations were leaning towards keeping rates unchanged, but the strong job report has brought the possibility of a rate hike back into consideration. If the inflation data for August, to be released on September 11, shows further increase, a rate hike in September is almost certain.
On September 3, Federal Reserve Governor Christopher Waller stated that unless there are unexpected developments in the inflation data on September 11, he leans towards maintaining the status quo at the September meeting. However, if inflation starts to rise again, it might be enough to sway his support towards a rate hike.
Waller, speaking at an event hosted by Reuters, emphasized the significant impact of August’s inflation data on his policy decisions. If inflation continues towards the 2% target, he is willing to support keeping the policy rate within the current range of 3.50% to 3.75%; if the data indicates overheating, he would consider a rate increase.
He believes that the current policy only mildly dampens aggregate demand, and a slight adjustment of the policy stance could help ensure prices return to a downward trajectory.
The overall inflation rate in the U.S. stood at 3.7% in July, with the core inflation rate at 3.3%. However, Waller believes that the underlying trend is actually better than what the core data suggests, and that the 12-month data may not be the best indicator of the current inflation situation.
Calculating inflation based on the Fed’s preferred inflation gauge, the annual inflation rate has decreased from 4.76% in February to the current 3.05%. Waller stated that this improvement is significant and the speed of decline is encouraging.
Despite this, there are internal divisions within the Fed. At the July meeting, three members voted in support of a 25-basis-point rate hike.
Federal Reserve Governor Michael Barr warned on September 2 that if inflation does not abate, the Fed should be prepared to raise rates this month, stating that there are entrenched risks after five years of inflation running above target.
On the other hand, New York Fed President John C. Williams believes that inflation is continuing to moderate as the impact of tariffs fades, leaning towards keeping rates steady.