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United States Unemployment August 2018

United States: Strong payroll gains buttress hourly earnings in August, paving the way for Fed rate hike in September

The August employment report showed the U.S. economy continuing to operate at full speed, once again recording strong payroll gains which are poised to support consumption dynamics going forward. Non-farm payrolls increased by 201,000 in August, slightly above market expectations of 195,000 and well ahead of the downwardly revised 147,000 jobs added in July (previously reported: +157,000). August represents the 95th consecutive month of job creation, the longest streak on record in the U.S. economy. With downward revisions to June and July payroll data, the economy added an average of 185,000 jobs per month in the past three months. Although this number is slightly under the average pace of job creation over the past year, potentially hinting at a small loss of momentum in the domestic economy, it nevertheless remained robust and well-above the growth needed to absorb new entrants in the labor market, which suggests further downward pressure on the already multi-decade-low unemployment rate in the months to come. This is also suggested by the average of weekly unemployment benefits claims in August, which reached a 49-year low.

Though payroll gains remained strong, one of the only negative developments in the August report was a small contraction in manufacturing jobs. This could indicate a less positive outlook in the sector due to escalating trade tensions between the United States and China—which are already causing some manufacturers to delay or modify their long-term expansion plans, according to ISM survey data. Indeed, the prospect of looming tariffs on USD 200 billion of Chinese imports—which have recently been reviewed by U.S. Trade Representative Robert Lighthizer, and could theoretically be imposed as soon as September—is likely adding to the disruption caused by the previous rounds of tariffs enacted in recent months by the Trump administration. However, the disappointing data in August could just as well be a temporary blip, especially given that the numbers are still subject to further revisions.

Overall, the job market expansion in August was again underpinned by strong growth in the services sector. Notably, the continued resilience of payroll gains for professional and business services, as well as education and health services, contributed to just over half of the jobs created in the month, while notable accelerations in job growth were recorded for transportation and warehousing, wholesale trade, financial activities and other services. Nevertheless, and despite the labor participation rate falling by 0.2 percentage points to 62.7%, the unemployment rate remained steady in August at July’s 3.9%.

As for earnings, the data show that the very tight labor market is putting upward pressures on wage growth as employers reportedly find it increasingly difficult to find skilled workers in several industries—notably in construction, trucking or tech-oriented fields. Annual wage growth accelerated to 2.9% in August, up 0.2 percentage points from July and the highest figure since 2009. However, this increase only equals the inflation rate reported in July, which indicates (barring a lower reading in the August inflation data) that real wage growth has still been so far nonexistent. In month-on-month terms, average hourly earnings increased 0.4% in August, up from 0.3% in July. Taken together, these August numbers are very strong, and are likely to comfort the Fed in its probable decision—overwhelmingly expected by our panelists—to raise rates by 25 basis points at its next meeting on 25-26 September.

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