U.S. August employment report not overly reassuring for the Fed

Non-farm payrolls increased by 173k in August, well shy of expectations for a 217k gain. Still, revisions to the previous two months added 30k and 14k to July and June numbers, respectively.Private payrolls rose by 140k, also missing consensus by a wide margin. Private services growth was led by education & health care (+62k), while leisure & hospitality and business services added 33k apiece. Trade and transport (+28k) and finance & insurance (+19k) also expanded payrolls.

Goods-producing industries had a terrible month, shedding 24k. Construction payrolls added just 3k on the month. Manufacturing (-17k) lost jobs for the first time in more than a year, while the cuts in the mining, oil & gas sector (-10k) intensified from the more muted losses over the previous two months.

Government payrolls surged on the month, adding 33k on strong gains across state and local levels, while federal government hiring was little changed (+2k).

The unemployment rate ticked down 0.2 percentage points to 5.1 % as the labor force shrank by 41k, despite strong gains in household employment (+196k). The labor force participation rate remained unchanged at 62.6% - its lowest level since 1977. Average hourly earnings rose 0.3% during the month, beating expectations for a 0.2% gain. The year-over-year measure accelerated from 2.1% to 2.2% in August. Average weekly hours ticked up to 34.6.

This morning's highly anticipated employment report was expected to clarify, but instead managed to further cloud the picture of the underlying health of the U.S. economy. The headline payroll gain certainly disappointed, with significant contractions in manufacturing and mining sectors. While not surprising given the global backdrop, losses were more severe than expected. This suggests that weaker global demand and slumping oil-patch investment may be having more of an impact on the U.S. economy than anticipated earlier. Moreover, overall private service sector gains, at just 164k, were the weakest since March - when Boston and much of the Northeast was buried under several feet of snow. 

On the other hand, one can take some comfort from the fact that government has in recent months added consistently to payrolls after years of weakness. In fact, the 81k added to public payrolls over the last three months is the strongest performance of the recovery (aside from Census related hiring in 2010). Additional comfort could be derived from history, with August payrolls typically seeing strong upward revisions, with the third reading about 74k higher than the first reading during this recovery. If history is repeats itself, the 173k gain in August could look closer to 250k by the time November rolls around. 

Adding even more fuel to the debate is the decline in the unemployment rate and acceleration in wage gains. The jobless rate, which at 5.1% is consistent with current estimates of the natural rate should not, in and of itself, induce the Fed to raise rates in September. But, if it manifests in stronger wage pressures in the coming months, we could conceivably see the Fed moving later this year.

"All in all, while there are reasons not to put too much emphasis on this report, we nonetheless feel that the details are not overly reassuring as far as U.S. economic strength is concerned. In light of this, and continued global uncertainty and market turmoil, we expect the Fed will delay its long-awaited liftoff in September", TD Economics.