Labor Market Shows Some Muscle Despite Slower Job Growth

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Mike Groll/AP
By Lucia Mutikani

WASHINGTON -- U.S. job growth slowed in August, but the unemployment rate dropped to a near 7½-year low and wages accelerated, keeping alive prospects of a Federal Reserve interest rate hike later this month.

Nonfarm payrolls increased 173,000 last month after an upwardly revised gain of 245,000 in July, the Labor Department said Friday. August's gain was the smallest in five months as the factory sector lost the most jobs since July 2013.

The jobs count, however, may have been tarnished by a statistical fluke that has often led to sharp upward revisions to payroll figures for August after initial weak readings.

Indicating the hiring slowdown was likely not reflective of the economy's true health, the jobless rate fell two-tenths of a point to 5.1 percent, its lowest level since April 2008.

%VIRTUAL-pullquote-The payrolls data is certainly good enough to allow for a Fed rate hike in September.%In addition, payrolls data for June and July were revised to show 44,000 more jobs created than previously reported, bringing the average job gains for the past three months to a solid 221,000. Average hourly earnings increased 8 cents, the biggest rise in seven months and the length of the average workweek also expanded.

"The payrolls data is certainly good enough to allow for a Fed rate hike in September," said Alan Ruskin, global head of currency strategy at Deutsche Bank (DB) in New York. "The big question is still whether financial market volatility will scupper the plans."

Stocks on Wall Street, which could be pressured by higher rates, ended down more than 1 percent. Prices for U.S. government debt rose, while the dollar fell marginally against a basket of currencies.

While the mixed report did little to alter views that the U.S. economy remains vibrant despite volatile global financial markets and slowing Chinese growth, it could further complicate the Fed's decision at a policy meeting on Sept. 16-17.

In the wake of a recent global equities sell-off, financial markets significantly scaled back bets on a September rate hike over the past month. But Fed Vice Chairman Stanley Fischer told CNBC last week it was too early to decide whether the stock market rout had made an increase less compelling.

"With this jobs report ... the Federal Reserve finds itself in a real uncertainty jam," said Mohamed El-Erian, chief economic adviser at Allianz in Newport Beach, California.

Missing Forecasts

Economists in a Reuters survey had forecast nonfarm payrolls increasing by 220,000 last month, but they had also warned that the model used to smooth the data for seasonal fluctuations is often thrown off at the start of a new school year.

They said the data could be further muddied because of a typically low response rate from employers to the government's payroll surveys in August.

But the evidence of a tightening labor market added to a string of upbeat data, including figures on automobile sales and housing, that has suggested the economy was moving ahead with strong momentum after growing at a robust 3.7 percent annual rate in the second quarter.

The decline in the unemployment rate brought it into the range that most Fed officials think is consistent with a low but steady rate of inflation, and would likely bolster their expectation that a pick-up in wages will help lift inflation toward their 2 percent target.

A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment fell to 10.3 percent, the lowest level since June 2008.

In August, construction payrolls rose 3,000 on top of the 7,000 jobs added in July. Mining and logging employment fell by 10,000 jobs, the eighth straight monthly decline.

The sector has shed 90,000 jobs so far this year, with industries that support mining activity accounting for 80 percent of the drop. Oilfield giants Schlumberger (SLM) and Halliburton (HAL) and many others in the oil and gas industry have announced thousands of job cuts this year.

Manufacturing payrolls slid 17,000 as sharp declines at metals, machinery and food industries offset a solid increase in employment in the automobile sector.

The 0.3 percent increase in hourly earnings left them 2.2 percent above their year-ago level, still well below the 3.5 percent growth rate economists consider healthy.

Aggregate weekly hours rose 0.4 percent, the largest gain since November. The combination of more hours and higher earnings left workers with a 0.7 percent increase in their take-home wages.

Some analysts think average hourly earnings are being held back by falling wages in oil field services.

But a tighter labor market and decisions by several state and local governments to raise the minimum wage should eventually translate into faster earnings growth.

A number of retailers, including Walmart (WMT), Target (TGT) and TJX Cos. (TJX), have increased pay for hourly workers since the start of the year.

"Regardless of which meeting this year the Fed begins to raise rates, next year we expect core inflation to surprise on the upside, forcing the Fed into tightening policy more aggressively than the markets currently anticipate," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

9 Numbers That'll Tell You How the Economy's Really Doing
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Labor Market Shows Some Muscle Despite Slower Job Growth
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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