In a way, today’s jobs report was disappointing. The U.S. added 130,000 jobs in August, which was less than the 150,000 that analysts had expected. It’s less than the roughly 200,000 per month we’ve tended to average for the last several years, and it’s especially disappointing in light of decennial Census hiring that likely added 25,000 jobs that should have been gravy on top of normal job growth.
On the other hand, the report had good news: It showed that wage growth had sped up and beat expectations. Average hourly earnings grew 0.4 percent in August and 3.2 percent over the last year. And unemployment remained very low, at 3.7 percent.
As with so many economic reports lately, there’s something here for everyone.
For another example, the ISM manufacturing index fell below 50 for August, suggesting the U.S. manufacturing sector is shrinking. That figure was even worse than analysts had expected, and suggests the trade war is discouraging U.S. firms from investing and growing. But ISM’s service-sector survey showed increasing strength in August.
It’s important to note: While rising wages with slowing job growth is a mixed story for workers, it’s a concerning one for stockholders, as it means both less business expansion and rising labor costs that reduce profit margins. And if strong wage growth persists, the Federal Reserve might decide it’s not having so much trouble hitting its inflation target anymore, therefore it’s done with its “mid-cycle adjustment” series of rate cuts. A shift to tighter interest-rate policy might, in turn, lead to a cooling in wage growth.
But that’s getting ahead of ourselves. So far, these shifts aren’t big enough to mean big changes to either the economic outlook or the outlook for future Federal Reserve rate decisions. The Fed remains highly likely to cut interest rates when it meets in two weeks, but only by another quarter point.
The markets’ rebound this week was mainly driven not by economic data but by good public-policy news, in the form of signs of thawing in the U.S.–China trade relationship. This rebound was consistent with the optimistic theory of the trade war: that it would harm specific sectors of the U.S. economy, but its effects would not be so large as to greatly impair consumer spending or drag down the whole economy.
The open question is whether that optimistic outlook can be maintained until and through the planned early-October meetings between U.S. and Chinese trade negotiators. Prior thaws have been temporary; if this one also proves temporary, so should the stock market rally.