The U.S. economy added 162,000 jobs in August, significantly exceeding the consensus estimate of 53,000 and representing a sharp improvement from the subdued pace of hiring earlier this summer. The unemployment rate remained unchanged at 4.1%, continuing to signal a generally healthy labor market. In addition, previously reported employment figures were revised higher, with July now showing a gain of 21,000 jobs rather than a decline of 23,000, while June payroll growth was revised to 31,000 from 20,000. Taken together, the August report and prior-month revisions meaningfully ease concerns that the labor market was beginning to deteriorate.
The Investment Committee believes that ongoing tensions in the Middle East will continue to weigh on U.S. economic growth over the longer term. Although elevated energy prices declined by more than 20% in June amid optimism that the conflict was coming to an end, prices have risen again as geopolitical tensions reemerged. Gasoline prices averaged $4.07 nationally in August and have continued to move higher in early September. We expect elevated energy costs to put upward pressure on upcoming inflation data and weigh on consumer spending as we enter the fourth quarter, although the continued resilience of the labor market provides the economy with a stronger near-term cushion.
This morning’s Nonfarm Payrolls report follows Wednesday’s ADP employment report, which showed job gains of 38,000, slightly below the consensus estimate of 46,000. The official payroll report, however, showed considerably stronger and relatively broad-based job creation. Food services and drinking places added 59,000 positions, while local government education added 42,000 following a sizable decline in July. Manufacturing and healthcare also recorded employment gains, while the information and financial sectors lost jobs. Despite the strong headline number, the labor market continues to exhibit characteristics of a “low hire, low fire” environment, with layoffs remaining historically low but hiring rates still subdued.
Wage growth also remains an important consideration. Average hourly earnings increased 3.1% from a year earlier, below the 3.4% year-over-year increase in consumer prices reported for July. While job creation remains healthy, the combination of elevated inflation and energy costs continues to pressure household purchasing power. At the same time, demographic trends and reduced immigration have lowered the pace of job creation needed to keep unemployment stable, suggesting that monthly payroll growth may remain structurally lower than historical averages without necessarily signaling economic weakness.
The Investment Committee continues to view inflation as the leading near-term risk, a concern that Chair Warsh also highlighted in his Jackson Hole speech. Importantly, this morning’s stronger employment report reduces concerns surrounding the Fed’s dual mandate and gives policymakers greater flexibility to remain focused on returning inflation to target. With economic activity and employment appearing more resilient than previously thought, the upcoming August Consumer Price Index (CPI) and Producer Price Index (PPI) reports will take on even greater importance ahead of the Federal Reserve’s September meeting. A renewed acceleration in inflation would strengthen the case for additional monetary policy tightening, while softer inflation data could allow policymakers to remain patient despite the stronger labor-market backdrop.