Jobs Report Review:US okay but nothing spectacular

Today's solid jobs report supports the case for a Fed rate hike in September. However, because it was only okay and nothing spectacular the next employment report and the two remaining CPI reports ahead of the September FOMC meeting could still determine the timing of the first hike.

The fact that the July FOMC statement noted that it will be appropriate to raise rates after the Fed has seen "some" further improvement in the labour market suggests that the bar for action in September seems quite low. Thus the trend-like gain in payrolls in July and a steady unemployment rate of 5.3% very close to the Fed's year-end projection of 5.2-5.3% should be good news for the Fed. The Fed is forced to revise down its unemployment forecast at the September FOMC meeting, when new projections are released.

In addition, the unemployment remains just 0.1% point higher than the Fed's estimated 5.0-5.2% range for the NAIRU. Even though wage growth still seems fairly subdued, it would be very difficult for the Fed to keep rates unchanged with unemployment so close to the level it believes is consistent with full employment. Not only did payrolls growth remain solid in July, but job gains were also the most broadly spread across industries since December. Broadly-based job growth is a sign of a healthier economy since no single sector is pulling everyone else along.

Signs of labour market progress spreading to a wider range of workers should also be good news for the Fed. Thus, the involuntary part-time employment rate - also one of the measures on the Janet Yellen dashboard - fell to a new recovery-low in workweek rose in July to 34.6 hours, matching the highest level since 2006, just shy of the 34.7 hours pre-recession peak. So in terms of the potential for longer hours, there is only little slack left in the labour market.

"Wage growth remained sluggish in July, supporting the case for only a slowly pace of Fed tightening after the initial rate hike. Average earnings are up at a 2.6% annual rate so far this year. We continue to believe that some special factors were the reason behind the surprisingly weak Q2 employment cost index (ECI)", says Nordea Bank.