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A Goldilocks Jobs Report Just In Time For Labor Day
The August US jobs report is among the best we have seen in some time and provided an uplifting backdrop for the Labor Day weekend. Labor demand is solid and becoming more broad-based, unemployment remains low, and labor supply improved in August. At the same time, moderate wage growth and solid productivity gains show that inflationary pressures are subdued in the labor market.In other words, the report reinforces our view that the Fed has little reason to worry about the employment side of its dual mandate. It leaves Fed policymakers free to focus on inflation. Let's take a deep dive into the report: I. Job Growth The US economy added 162,000 jobs in August, well above expectations, while the change in July payrolls was revised up to 21,000 from -23,000 (chart). Payrolls increased by an average of 71,300 over the past three months, while the six-month average rose to 107,000, its highest since July 2024. So far this year, job growth has averaged about 80,000 per month, up sharply from just 10,000 per month in 2025. Leisure and hospitality led job growth, adding 62,000 jobs after losing 75,000 over the prior two months (chart). Local government education employment increased by 33,200 ahead of back-to-school season, while health care and social assistance also contributed meaningfully. The AI investment boom is boosting employment in other industries. Manufacturing payrolls increased by an average of 14,000 over the past three months, the strongest gain since December 2022. The three-month average of construction job growth reached its highest level since January 2025 (chart). The payroll employment diffusion index confirms that job gains are spreading, with more than half of industries adding jobs in August. Both the one-month and six-month measures of hiring breadth reached their highest levels since January 2024 (chart). The broadening is particularly evident in manufacturing, where 59% of industries added jobs in August, the highest share since October 2022 (chart). II. Unemployment and Labor Market Slack The unemployment rate remained unchanged at 4.1% in August, keeping it near prior cyclical lows (chart). The broader U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, fell to 7.7%, its lowest reading since January 2025. Another sign of limited labor-market slack is the recent decline in the number of workers employed part-time for economic reasons (chart). III. Labor Supply The unemployment rate was unchanged despite the 683,000 increase in the labor force. That was the largest gain since January 2025. The labor force participation rate rose to 61.6% in August, its first increase in nine months (chart). Nevertheless, it remains historically low. The outlook for labor force growth remains anemic. Structural headwinds from the wave of retiring Baby Boomers and a shrinking foreign-born labor force remain. August's uptick in the labor force isn't the start of a new trend. Indeed, on a y/y basis, it is still declining at a historically rapid pace (chart). IV. Earned Income Proxy Our Earned Income Proxy (EIP) for private-sector wages and salaries in personal income rose sharply in August. Average weekly hours worked rose 0.3% m/m to 34.4, the highest level since March 2024 (chart). That gain, combined with the 0.1% m/m increase in private payrolls, drove a 0.4% m/m rise in aggregate weekly hours worked to a record high (chart). Adding the 0.3% increase in average hourly earnings resulted in a robust 0.7% increase in our EIP, its best gain since January 2026 (chart). The Cleveland Fed’s Nowcasting model estimates that the headline PCED rose 0.4% m/m in August, implying that our inflation-adjusted EIP rose by around 0.3% (chart). V. Wage Inflation On a y/y basis, average hourly earnings growth eased to 3.1% in August, the slowest pace since May 2021 (chart). Slowing wage growth and subdued unit labor costs confirm that the labor market is not currently a source of inflationary pressure (chart).
Boom Lifts Bond Yields
I. Stocks, Bonds & Waller Today, the S&P 500 had its best day in a month as Treasury yields edged lower and the dollar dropped to its lowest level since May. The policy-sensitive 2-year Treasury yield retreated to 4.34% after briefly rising to 4.41% on Tuesday. These moves reflect a decline in the probability of a September rate hike to about 50%, down from 70% earlier this week. The catalyst was comments from Fed Governor Christopher Waller. While he said he's willing to hold the policy rate steady if progress toward the Fed's 2% inflation target continues, he also stressed that it would not take much evidence of persistent inflation pressures to support a hike. With recent data showing "some signs of disinflation," the burden of proof is now on the inflation data to justify a hike. The financial markets concluded that Waller is an owl, i.e., an FOMC voter watching incoming inflation data before deciding whether to vote for a hike at the Committee's September 15-16 meeting. We reckon that of the 12 voters on the FOMC, five are hawks (i.e., ready to hike), while six are owls. That's why bonds and stocks rallied today when Waller joined the latter birdies. They also rallied today because the yen rebounded, without any intervention by the Bank of Japan, on expectations that the central bank will soon raise its policy rate and on second thoughts about a Fed rate hike (chart). The good news is that stocks should do well, as Fabulous Earnings Momentum (FEMO) reported by Broadcom, Dell, and Snowflake continues to support the bull market. Our two favorite bull-bear ratios remain relatively neutral, providing neither a strong buy nor sell signal (chart). FEMO, however, is sending a loud buy signal! II. GDP & Bonds Earnings are strong because the economy is booming. The Atlanta Fed's GDPNow model is projecting real GDP growth of 4.7% (saar) in Q3 (chart). Consumer spending is expected to rise 3.8%, while AI-driven business investment remains strong, with equipment spending projected to increase 18.3% and intellectual property investment 6.8%. Final sales to private domestic purchasers are running at 4.6%. That's impressive, given that the trade deficit has widened as US imports of computer hardware, components, and accessories soar amid the AI building boom (chart). The Weekly Economic Index (WEI) rose to 3.1% in the week of August 28, its highest reading since early July (chart). The index combines 10 measures of consumer activity, labor markets, and production. It is scaled to real GDP growth and reinforces the Atlanta Fed's strong readings. The recent increase in the 10-year TIPS yield has closely tracked the Weekly Economic Index, suggesting that higher Treasury yields reflect stronger economic fundamentals, not bond vigilantism (chart). III. NM-PMI The service sector continues to expand at a solid pace. The ISM NM-PMI rose 1.3 points to 55.4 in August, its highest reading since February (chart). All major components except employment remain in expansion territory, i.e., greater than 50.0. New orders growth accelerated to the fastest pace since early 2023, while a measure of business activity was the strongest since 2022 (chart). The August ISM PMI surveys suggest both manufacturing and services remain in good shape. Services continued to lead, with stronger business activity and new orders, while manufacturing stayed firmly in expansion territory with a PMI of 54.6 (chart). Prices paid remained elevated in both sectors, while growing backlogs and export orders suggest economic growth remains broad-based. IV. Inflation Meanwhile, inflation remains an issue. Prices-paid indexes stayed elevated in August, with the services measure jumping to 72.6, its highest reading since August 2022 (chart). The jump in the services prices-paid index should warn the Fed, as the index has historically led headline PCED inflation (including goods and services) by about three months (chart). Furthermore, the prices-paid and prices-received averages from the regional Fed surveys have eased from recent highs but remain well above levels consistent with the Fed's 2% inflation target (chart). Historically, both have tracked core PCED inflation closely. V. Labor Market The labor market data continue to confirm our view that the labor market remains well balanced at full employment, giving the Fed room to focus primarily on the inflation side of its dual mandate. The average of the ISM manufacturing and services employment indexes is lackluster because companies are boosting their productivity to offset labor shortages (chart). Additionally, layoffs remain remarkably subdued. Announced job cuts during the first eight months of 2026 were the lowest in four years, according to Challenger, Gray & Christmas (chart). Initial claims tell the same story, remaining historically low at 206,000 in the week of August 28 (chart). Meanwhile, continuing claims have resumed their recent downward trend.
On Housing, Technology & mRNA’s Potential
The rising mortgage rate isn’t good news for a housing market that’s already in the dumps. The only positive news is that the market may be slowly adjusting, with builders starting construction on fewer new homes and cutting prices, Jackie reports. ... She also takes a look at one of Australia’s neoclouds, which is being helped by the country’s new regulations and ample funding from Nvidia and others. ... And: The news that Moderna’s mRNA treatment of melanoma was successful in Phase 3 trials gave many patients hope. We look at how Moderna and other companies aim to use mRNA to treat more cancers and diseases.
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