As far as the Federal Reserve is concerned, the American workforce is now fully employed.
The jobless rate dropped to 5.1 percent in August, the lowest since April 2008, from 5.3 percent the prior month, the Labor Department said Friday in Washington. Payrolls grew by 173,000, less than projected and the smallest gain since March.
By the central bank’s calculations, unemployment is now low enough that any additional decrease will begin to lift wages as employers compete for a dwindling pool of workers. Policy makers probably have reason to start boosting interest rates as soon as this month as companies contending with higher labor costs may start raising prices and spur a pickup in inflation.
Less Slack
“The slack in the labor market is diminishing quite rapidly,” said Michael Feroli, chief U.S. economist at JPMorgan Securities LLC in New York, and a former Fed Board economist. “That should leave the Fed close to liftoff. September is what they should do. The labor market, overall, is solid.”
The yields on short-term Treasury notes climbed as investors pulled forward expectations about when the Fed will increase its benchmark interest rate. Two-year note yields rose 0.02 percentage point to 0.71 percent as of 12:18 p.m. in New York. The Standard & Poor’s 500 Index fell 1.5 percent to 1,921.75.
Unemployment in the range of 5 percent to 5.2 percent is consistent with keeping prices rising around their 2 percent goal, according to Fed estimates. Joblessness can’t be expected to drop to zero because there are always people transitioning between jobs or lack the skills that employers seek.
Lower NAIRU
The acronym for this frictional level of joblessness is NAIRU, or the non-accelerating inflation rate of unemployment. Policy makers in March lowered their estimate for the rate, which means there is nothing stopping them from doing that again at their meeting this month should they want to delay raising interest rates, said Omair Sharif, rates sales strategist at SG Americas Securities LLC in New York.
“September is the perfect opportunity to drop NAIRU down a little bit further,” he said. “The unemployment rate optically makes it difficult for the Fed to keep waiting and waiting and waiting. But if you drop NAIRU down, you buy yourself a little bit more time.” Sharif said, adding that he wouldn’t be surprised if policy makers lowered the bottom of the range to around 4.8 percent.
Median Forecast
The increase in payrolls last month fell short of the 217,000 median forecast of 97 economists surveyed by Bloomberg. Estimates ranged from 130,000 to 253,000.
Revisions that added a combined 44,000 jobs to the payroll counts for the previous two months helped make up for some of the shortfall with the survey median.
Factory Payrolls
A 17,000 slump in factory employment, the biggest since July 2013, held back the hiring count. Producers of machinery, metals, food, plastics and rubber pared jobs, while automakers took on more workers.
Health-care companies, restaurants and local government agencies were among the other employers also adding to staff last month.
“All in all, this is a very good report,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, whose projection for 180,000 payrolls was among the closest in the Bloomberg survey. “It doesn’t seem, based on other data, that what’s happened in financial and international markets is significantly affecting the U.S. economy.”
The Labor Department’s initial estimate of August payrolls has tended to disappoint compared with consensus projections and is typically revised higher in ensuing months.
From 2005 to 2014, forecasters over-estimated the initial August payrolls print seven times, including in each of the past four years. Excluding annual and benchmark revisions, the Labor Department marked up its first estimate in subsequent months in eight years over the same period.
Aside from the smaller-than-projected gain in employment, the rest of the jobs report was upbeat.
Still Upbeat
Average hourly earnings increased 0.3 percent in August from the prior month, more than estimated, and were up 2.2 percent over the past year. The average workweek for all employees also picked up, rising by six minutes to 34 hours and 36 minutes, the longest in six months.
The gain in employment combined with the increase in the workweek lifted the index of aggregate weekly payrolls by 0.7 percent last month, the biggest gain since January.
The data will help Fed officials judge whether the labor market is showing the ongoing improvement necessary to merit an interest-rate increase at their Sept. 16-17 gathering. Some policy makers have said financial markets and a weakening Chinese growth outlook muddy the argument for a rate hike this month.
The Fed is “following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual,” Federal Reserve Vice Chairman Stanley Fischer said Saturday at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming.
Fischer left the door open to a rate increase this month, arguing that policy makers shouldn’t wait until inflation reaches the Fed’s 2 percent goal amid healthier labor market conditions.
—With assistance from Alexandre Tanzi and Shobhana Chandra in Washington.
To contact the reporter on this story: Michelle Jamrisko in Washington at mjamriskobloomberg.net To contact the editors responsible for this story: Carlos Torres at ctorres2bloomberg.net Vince Golle