Strong jobs report puts focus on inflation ahead of Fed meeting
The U.S. added 162,000 jobs in August and 55,000 more jobs than first reported in June and July — data economists say makes the Fed more likely to raise rates.
The surprisingly strong August jobs report has made it clear that the Federal Reserve will be paying very close attention to next week's inflation data to determine whether it will need to raise short-term interest rates.
Job gains far exceed expectations: The U.S. economy added an estimated 162,000 jobs last month, according to the U.S. Bureau of Labor Statistics (BLS). That's well above the forecast of 53,000 added jobs and a huge turnaround compared to the June and July numbers, which were revised up to 31,000 and 21,000 jobs gained, respectively.
In its Sept. 4 report, the BLS also pegged the unemployment rate at 4.1% as stronger labor market participation kept the level unchanged from July.
Fed expected to focus on inflation data: With this latest jobs report offering no indication that the labor market is weakening, the Fed can turn its attention to inflation. The federal government's next monthly inflation report will be released on Sept. 11, and the Fed is scheduled to hold its FOMC meeting a few days later.
"What inflation does next week and throughout the fall — not today's payrolls — will set the stage for where mortgage rates land early next year, right as buyers and sellers start making plans again," said Jake Krimmel, senior economist at Realtor.com.
Odds of a rate hike increase: Investors are sensing a rate hike is coming in September. The CME Group's FedWatch tool put the odds of a rate hike at around 50-50 earlier this week after Fed Gov. Christopher Waller addressed inflation concerns in a Sept. 3 speech. Those odds increased further to 60.4% on Friday.
While a strong labor market is good news for the housing market in the long term when it comes to relocations and new household formation, persistently elevated inflation will likely lead to more short-term pain.
At 3.4%, the inflation rate in July was running well above the Fed's 2% target rate, prompting more discussions about the possibility that the central bank may raise rates. While short-term interest rates are not directly tied to mortgage rates, a rate hike would keep 30-year rates near the 7% level and act as a strong headwind for home sales.
"Elevated mortgage rates will still determine how much of that pent-up demand can translate into sales," said Sam Williamson, senior economist at First American. "Even so, a healthy labor market keeps households better positioned as the market gradually rebalances."
One wild card in the upcoming rate decision: How the central bank will respond to pressure from President Donald Trump, who wants short-term interest rates lowered. In a Friday post on social media, the president threatened to halt trade between the U.S. and countries it has a trade deficit with if the Fed does not cut rates. The U.S. currently has a trade deficit with over a dozen countries, including neighbors Mexico and Canada.
Trump reiterated his comments while speaking with members of the media Friday afternoon.
Wages aren't keeping up: Hourly earnings rose 3.1% year-over-year, which means wages are not growing as quickly as consumer prices are rising.
Though consumer spending was up 0.2% in July compared to June, spending has slowed and may continue to do so as the extra cash many Americans received from higher tax refunds fade, according to Goldman Sachs economists.
Construction employment jumps: Friday's jobs report also showed strong gains in the home building industry, with 10,700 jobs added in August. But those gains are out of sync with other building data, noted Jing Fu, senior director of forecasting and analysis at the National Association of Home Builders, who suggested in an online post that there could be some downward revisions in future labor market reports.
While overall unemployment held steady in August, the unemployment rate for construction workers fell on a seasonally adjusted basis from 4.6% in July to 4.1%. This, Fu said, marks the lowest rate since April.
"After several months of volatility, the construction unemployment rate has returned to its year-ago level, suggesting that labor market conditions have stabilized," Fu wrote.