August jobs report gives Fed green light for rate hike
INSIGHT ARTICLE |
The August jobs report showed employment increased by 173,000 with an additional 44,000 added to the June and July estimates. That brings the total increase to 217,000, in line with the economic consensus and slightly above our forecast of 205,000.
The August employment report is typically affected by difficult seasonal adjustments, which usually manifest as a downward bias on the initial estimate. As a result, we are likely to see significant upward revisions in coming months. Thus, the headline job additions probably understate the true magnitude of job creation on the month and the growing tightness in the overall labor market.
Details inside the August employment report show the private sector generated 140,000 jobs, with trade and transport and retail trade arriving well below their recent trends. Those are the sectors most likely to see upward revisions in coming months. Otherwise, job gains continue to be broad-based and indicative of the breadth and depth of the recovery in the labor market.
Meanwhile, and perhaps most important, the unemployment rate declined to 5.1 percent from 5.3 percent as 196,000 people entered the workforce. This should bolster the case for those at the Federal Reserve who are ready to raise rates at their Sept. 16- 17 meeting. The decline in the unemployment rate assures policymakers that the labor market will be at full employment in the near term.
Since January 2014, the economy has generated an average of 241,000 jobs per month, or more than double the rate necessary to bring down the unemployment rate. Under these conditions, forward-looking central bankers should be making policy based on where they anticipate the economy will be in 12 to 18 months, rather than waiting on backward-looking economic data. In other words, the time has now arrived the Fed to take the next step in policy normalization even given recent volatility in financial markets generated by conditions in the external economy.
Source: McGladrey, BLS