Fed’s LMCI points to solid labor markets in August

The Federal Reserve's Labor Market Conditions Index (LMCI) rose 2.1 points in August, the largest monthly improvement in US labor markets since January. Prior months' readings for 2015 were revised up by a net 2.3 points in this morning's release. 

As of August, the Fed's measure has made up about 90% of the 2008-09 deterioration in labor market conditions, the index has now risen a cumulative 331 points through the expansion, versus a 370-point contraction from January 2008 through June 2009. 

"At an average monthly improvement of about 4 points per month, the index is on track to fully recoup labor market losses in the next nine months. In contrast, the August reading of the Barclays Indicator of Labor Market Conditions and Indicator of Labor Market Momentum suggests that US labor markets have already normalized, the conditions indicator is modestly above its two-decade average, while a strong August reading on momentum suggests improvement is set to continue", notes Barclays. 

Overall, labor markets are seen as meeting the FOMC's criteria for "some further improvement" but expect the committee to defer raising rates at its September meeting given persistently weak inflation, the recent tightening in financial conditions and risks to the domestic outlook from slowing growth abroad.

"The LMCI uses a dynamic factor model of 19 labor market indicators to extract a single index variable, which is one of the metrics the FOMC uses to assess overall labor market conditions. The release data include only monthly changes in the index, thus, these changes are used in the index over the business cycle to understand where labor markets stand", added Barclays.