162,000 Jobs and July Turned Positive. The Fed Just Got Its Cover.

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Updated 1115 ET

The Labor Department reported this morning that the American economy added 162,000 jobs in August. Consensus was near 56,000. The print came in close to three times what the street expected.

The unemployment rate held at 4.1%, exactly as forecast. Average hourly earnings rose 0.3% on the month and 3.1% over the year.

Then the part that matters more. July’s reported loss of 23,000 jobs was revised to a gain of 21,000. June went from 20,000 to 31,000. Between them the two months were revised up by 55,000.

This dossier led on Thursday with the observation that first prints do not survive revision, using the 103,000 jobs that May and June lost when the July report landed. That mechanism just ran in the opposite direction. The revisions this time took back 55,000 of it, and they took it back from the bearish side of the argument.

The household survey was stronger still. Employment rose 569,000 and the labour force grew 683,000, and the unemployment rate held at 4.1% anyway. Participation climbed from 61.4% to 61.6%, the employment-to-population ratio from 58.9% to 59.1%, and the broader U-6 underemployment measure fell from 7.9% to 7.7%. Part-time employment dropped by 414,000.

Going into the release, futures put the odds of a September rate increase at 50% and priced 32 basis points of tightening for the rest of the year. The dollar caught a firm bid in the aftermath.

An economy that absorbs 683,000 additional people into the labour force without the unemployment rate moving is not a labour market cracking. It is one being tested and holding. That is the single most important line in this report, and it is in the household survey rather than the payroll number everyone quotes.

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THE OPERATION

Two surveys, one month

Now hold the two surveys side by side, because they cannot both be right. On Wednesday, ADP counted 38,000 private jobs added in August. This morning the Labor Department counted 127,000. That is a gap of 89,000 on the same month in the same economy.

On manufacturing they do not merely differ in degree. ADP had the sector shedding 17,000 jobs. The Labor Department has it adding 16,000, against an expectation of 5,000. One survey says American factories cut staff in August and the other says they hired.

This is not a scandal, it is methodology. ADP counts its own payroll-processing clients. The Labor Department surveys establishments and households separately and revises for two months afterwards. When they diverge this far, the honest position is that the month is genuinely unclear, not that one number is the truth and the other is noise.

Which is worth remembering, because on Wednesday the market treated ADP’s 38,000 as a signal, and this newsletter gave it weight too. The composition looked damning: education and health carrying the entire total, manufacturing and professional services shedding staff. The Labor Department’s version has food services and drinking places adding 59,000, local government education 42,000, construction 22,000 and manufacturing 16,000, with information the only major sector down, at 23,000.

Note what local government education did. In the July report it was the largest single loser at 50,000 jobs. In this one it is the second largest gainer at 42,000. A sector that whipsaws by 92,000 in consecutive monthly prints is telling you something about the seasonal adjustment, not about school hiring.

Two things from Thursday do survive contact with this report. Average hourly earnings are running at 3.1% over twelve months against headline inflation of 3.7%, so the typical worker is still losing about six tenths of a point a year in real terms. And the three-month average of payroll growth is 71,000, which is a strong month sitting on top of two weak ones rather than a trend.

The useful lesson is not that Wednesday’s number was wrong and Friday’s is right. It is that anyone setting policy or positioning a portfolio on a single monthly print is reading a number with a 90,000 error bar and two months of revisions still to come. That cuts against the bears this week. It cut against the bulls three weeks ago. The revision mechanism has no politics.

RULES OF ENGAGEMENT

What it changes

The September 16 decision just got easier to defend and harder to predict. A committee that was split between Chair Warsh and Governor Barr on prices and New York’s John Williams on easing inflation now has a labour market print that removes the strongest argument against tightening. Going into today futures had that meeting at a coin flip.

Watch the front end for where that lands. The two-year is the instrument that prices a September move, and it is the one that matters for anything on a short reset, a card balance or a floating business line. A firm dollar in the aftermath is the first sign the market read this as clearing the path.

Do not overcorrect on one print. The three-month average is 71,000 jobs a month, participation is only back to 61.6%, and the same revision process that turned July positive can turn August negative when the September report lands on October 2. Position for the trend, not for the headline.

Real pay is still the number to watch at household level. Earnings at 3.1% against 3.7% inflation means a worker who stayed put has less purchasing power than a year ago, regardless of how many jobs the economy created. Strong payrolls and falling real wages can coexist, and right now they do.

Canada’s matching tariffs on roughly $20 billion of American goods begin on Tuesday, four days from now and eight days before the Fed decides. That is a fresh push on the price level arriving in the window between this report and the decision it informs.

The exposure is a policy decision that just lost its counterweight. For three weeks the case against tightening rested on a labour market that appeared to be contracting, and this morning that case weakened considerably: 162,000 jobs against a consensus near 56,000, July’s loss revised into a gain, 683,000 people absorbed into the labour force without the unemployment rate moving. The inflation argument has not changed. Prices are still running near 3.7% while wages run 3.1%. What changed is that the Federal Reserve can now raise rates on September 16 without having to explain why it is tightening into job losses. Whether it should is a different question from whether it can.

END OF TRANSMISSION.

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