August Jobs Report

Despite coming in slightly below expectations, the U.S. economy produced another month of over 100,000 jobs, a level the Federal Reserve believes will help maintain economic growth and low unemployment.   There were 151,000 jobs created in August, which was below economists’ expectations of 180,000 jobs. The Unemployment Rate and Participation Rate remained unchanged, coming in at 4.9% and 62.8% respectively.  Both the June and July reports, which were the strongest of the year so far, were revised in this latest release.  June was revised from 292k to 271k, while July was revised higher from 255k to 275k jobs created.  This, combined with the August data, results in a three-month average of 232,000 jobs created.

Although the number was strong from an absolute standpoint, the data may not have given the Federal Reserve confidence that the economy can handle a rate hike in September.  In fact, the probability of an increase in rates at this month’s meeting declined from 25% before the report to 12% after.  Odds of a December rate hike also declined, albeit at a smaller rate (57% to 51%).  As we have discussed in previous blogs, an important data point the Fed is focused on is wage growth.  There was a slight decline in wages, as the year-over-year figure fell from 2.6% growth in July to 2.4% in August.  This still outpaces the current rate of inflation but the slowing rate may give the Fed pause until a more sustainable growth pattern is achieved.

We believe this report to be consistent with a moderating labor market that remains supportive of economic growth.  The U.S. economy has created an average of 182,000 jobs per month this year, which is down from the monthly pace in 2014 and 2015 but is well above the Fed’s 100k estimate that supports low unemployment and economic growth.  However, there remains uncertainty as to whether the pace of job growth and wages is strong enough to support a rise in interest rates when the Fed meets later this month.  This uncertainty may result in market volatility as traders assess the potential for a rate hike by year end, as well as whether the U.S. economy can pick up the rate of growth as we head into the fourth quarter.  Given this uncertainty, as well as U.S. equity markets reaching all-time highs, we have either raised cash or let cash accumulate in client portfolios.  We will continue to monitor the current environment and deploy cash as we see opportunities to invest at more attractive levels.