The American labor market rests at or near full employment.
A 4.1% unemployment rate, a labor force increase of 683,000, and an advance of 162,000 in monthly hiring all point to a solid working definition of what that means in 2026.
Once one adjusts for a two-month upward revision of 55,000 to the June and July data that indicates a 217,000 increase in total employment in August, the three-month average of monthly hiring stands at 71,000.
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While this will not be satisfying to those looking for work—the underlying trend in monthly hiring remains well below recent historical experience—it does suggest that the labor market needs little policy attention.
All of which begs the question: What does that mean for the all-important Federal Reserve policy decision on Sept. 17?
We think that it strongly tilts toward a 25 basis-point rate hike. The central bank simply does not need to worry about the employment side of its mandate at this time.
The more pressing concern is restoring price stability.
We have been quite clear over the past year that our quantitative models estimating the optimal policy rate of the U.S. have implied that the Fed needs to hike rates to restore price stability.
Yes, the war-induced supply shock needs to be considered when setting policy. But with that condition not likely to end anytime soon, the Fed needs to make a call on the persistence of inflation amid that supply shock—which is a real issue—and act.
The Fed has three tools: its balance sheet, communications and the interest rate. The balance sheet is out of the question as a policy tool at the current time and Fed communications are still in the repair shop. So that leaves the federal funds rate at the primary channel through which the Fed will need to act.
While we will wait for the release of the producer price index and consumer price index data to make our final call, unless both arrive very weak we are leaning toward a September rate hike.
The larger question that will be a challenge for Fed communications policy is: Will it be a one and done or is the central bank at the start of a rate hike cycle that will seek to reverse the 75 basis points of cuts that were made last year.
The data
The composition of hiring in the August jobs report leaned toward lower-paying wage groups. Leisure and hospitality led the way with an increase of 62,000, with healthcare and social assistance increasing by 22,800 and temporary positions increasing by 7,000.
Higher-paying goods-producing jobs advanced by 41,000 jobs with construction increasing by 22,000 and manufacturing increasing by 16,000.
Trade and transport jobs expanded by 16,000, retail trade by 1,000 and government by 35,000.
Jobs losses were concentrated in the information sector, which had a decline of 23,000 positions, and the financial sector, which lost 11,000.
If one were looking for evidence of fresh AI-induced hiring weakness, it is within both of those sectors.
Average hourly earnings advanced by 0.3% on the month and by 3.1% from one year ago. On a three-month average annualized pace, wages increased by 2.7%, which will feed into arguments by the doves not to hike rates.
Aggregate hours worked rose by 1.4% on a three-month average hourly pace, manufacturing hours increased by 0.3% and overtime was up by 0.2%, all of which point to a sustained pace of solid to strong consumption.
The labor force participation rate increased to 61.6% overall and was at 83.4% for prime aged 25 to 54-year-old workers. The median duration of unemployment stands at 11.4 weeks.
The takeaway
The American labor market is in good condition heading into the end of the year. A 4.1% unemployment rate, a monthly trend of 71,000 jobs added, a 3.1% increase in average hourly earnings and increases in aggregate hours worked and overtime all point to solid household spending as the holiday shopping season approaches.
More important, the data does lend support to the hawks at the Federal Reserve who are growing impatient with inflation, which is now in its sixth year above the central bank’s 2% target.
While that decision is still a coin flip, our models all suggest that a rate increase should be strongly considered and is growing more likely by the day.
