Payroll employment is expected to rise a slightly tepid 175,000 in August after averaging more than 240,000 for the previous twelve months. Private employment is expected to increase by 170,000. We expect the unemployment rate to hold at 5.3%. The slowdown in employment growth is mostly cosmetic and reflective of the statistical agencies’ inability to seasonally adjust the data. August is among the most difficult months for the Bureau of Labor Statistics (BLS)to estimate; since the onset of the recovery in 2010 BLS has consistently undershot the final estimate for the month by a substantial margin. As the statistical agencies have been working hard to correct the problem in recent years, the revisions for the employment data are considerably smaller than they were even one year ago. In response, we have narrowed the miss for our August estimate from a reported 70,000 shortfall last year to 50,000 for the initial report this year. (E.g., we think the final data for the month of August will show a gain of 225,000 instead of 175,000.)
Employment data for the month of August has a lot of quirks (not the least of which is the timing of the start of the school year) that have made the increase in the establishment data tough to capture. Some schools in the Chicago area opened in early to mid-August this year, while the Chicago Public Schools are waiting until after Labor Day to reopen their doors. Threats of a strike are also extremely high this fall; most within the public system are bracing for a November walkout.
No matter how the August data comes in, there is an expectation that we will see a fairly large upward revision. Most on the Federal Open Market Committee (FOMC) believe the labor market has come close to improving enough to endure liftoff, although the vote is not unanimous. The debate over inflation remains heated (pun intended) though inflation is not.
Moreover, last year’s August miss was easier to discount than it may be this year. We had a slew of incoming data then that suggested the economy was reaccelerating as opposed to slowing; revisions were to the upside rather than the downside on the forecast. This year, the manufacturing indices have been particularly weak as manufacturers struggle with everything from an overhang of inventories to the strong dollar and concerns that growth across emerging markets could further cool even though we ship very little to China. Most of the slowdown in consumer spending, particularly in vehicle sales, has shown up as a blow to production in China, not the U.S.
Other issues to watch: Vehicle production was up and running in July when the plants are usually shuttered for retooling; this could show up as a drag on manufacturing activity in August. Retailers complain that a later-than-usual Labor Day holiday has pushed much of back-to-school spending into September as opposed to August; that could dampen retail hiring in August. Separately, the rise in wages associated with minimum wage increases at the state and local levels intensified over the summer, which could show up as a rise in overall wage gains and/or a slowdown in hiring in low-wage industries.
Bottom Line: The August employment report is more likely to complicate than clarify where the economy was prior to the recent stock market rout and heightened concerns about weakness abroad. That is not exactly reassuring for a Federal Reserve that is trying to raise rates for the first time in a decade. The bet is that they delay the decision to raise rates until December instead of September. Any decision, however, carries with it a higher risk for dissent than we have seen over the last year, which could also confuse rather than clarify the markets’ perception of where the Fed stands. The key for investors to realize is that it is the path of interest rate increases (likely to be shallow and almost imperceptible relative to what we have seen in the past) that matters most as opposed to the timing of the Fed’s first rate hike. The timing will play less of a role in assessing the Fed’s success when the history books are written on this difficult era.
