On the August Jobs Report

A payrolls miss made worse by downward revisions, and a low absolute number even worse when census workers are subtracted. But 130,000 net payrolls is very inconsistent with the 220,000 implied by contemporaneous labor market statistics, and with the 590,000 jump in employment in the “household survey,” which would have been over 1 million on a “payroll basis.” We expect upward revisions. The sharp growth in average hourly earnings, on top of an upward revision, implies pricing power for labor consistent with a strong economy, blunting the potentially recessionary message in the payrolls miss. But the economy is not strong enough to lure back the 2 million prime-age persons outside the labor force. This is a conundrum for the FOMC, where some members will reflexively see an inflationary risk in rising wages, while others will see a low-inflation economy that could grow faster if policy weren’t too tight. This duality confirms a 25 bp cut in September, not the optimal 50 bp.