NFP look ahead – it’s still all about wages

A robust ADP number, which saw 237,000 jobs created versus 185,000 expected, will likely see the consensus forecast for Friday’s jobs report nudged upwards. Currently, 180,000 jobs are predicted to have been created, from 209,000 the month before, while the unemployment figure is expected to hold at 4.3%. Average hourly earnings, meanwhile, are forecast to rise 0.2%, from 0.3% a month earlier.

It should be noted that the weakness in wage growth is likely due to the fact that August has two more work days relative to July, which will push the average hourly earnings figure down. Still, the overall picture is of a healthy job market, a sentence that has been true for months now. Indeed, it is starting to look a little odd – surely by now jobs growth should be slowing as the US reaches full employment (or as near as is possible in a free market economy). Instead, perhaps it shows there is more slack (spare capacity) in the economy than previously thought. Only a truly abysmal figure would start to worry the Federal Reserve, even a relatively hefty miss this month should not provoke an attack of the vapours among policymakers.

Hurricane Harvey may well have some impact on the jobs report, but it will take months for the Fed’s statisticians to work this out. The recent upgrade to second quarter growth estimates, and the signs that third quarter has also begun well, indicate that, by and large, the US economy is in the right place.

Still, the major issue is inflation, and that is still refusing to budge in any meaningful way. While consumer price index (CPI) has picked up over the past year, it has not moved upwards in the manner that might be expected in an economy that is growing at 3%. Until this begins to change, the Fed’s plans to keep tightening policy look under threat. Friday’s jobs report will therefore be watched for signs of higher wages that might feed through to inflation, in both its CPI and personal consumption expenditure (PCE) forms, the latter being the Fed’s preferred measure. The jobs number itself is just a sideshow.