Jobs Friday for August came with a bang to the upside, with 162,000 jobs created, positive revisions and an unemployment rate of 4.1%. All that — and the 10-year yield barely budged. In fact, we’ve had a lot of dramatic events this week and yields haven’t done much today, even with oil prices elevated and diesel prices back to yearly highs. The truth is, a lot is priced into the bond market now and it’s getting harder and harder to push yields — and mortgage rates — much higher.
Let’s break down this jobs report because, to me, it puts the 3-month job-creation average a tad above my break-even of 78,000, as we’ve averaged 82,000 jobs created per month over the last three months, which means the Fed isn’t too concerned about the labor market. This means the Fed can focus on the inflation data, and inflation week is next week. The odds of a September rate hike rose a bit today after this report.
BLS jobs report
From BLS: Total nonfarm payroll employment increased by 162,000 in August, and the unemployment rate was unchanged at 4.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in food services and drinking places and in local government education. The information industry lost jobs.
This was one of the better jobs reports in the past few years: you had labor force growth, a beat of job estimates, breadth in the jobs created and positive revisions. The only knock was that wage growth is at cycle lows, which I believe the Fed is loving right now.
As you can see in the chart below, the World Cup impact on the data has faded; the big job gains and losses we had in leisure and hospitality have worked themselves out of the data pool and we are back to normal in that sector. This headline jobs print number will probably be revised lower, but still, I believe the monthly average is above the Fed’s break-even numbers, meaning how many jobs need to be created to keep the unemployment rate low.
Now, if the labor force didn’t grow a smidge, the unemployment rate would have been at 4% in this report, instead of 4.1%. Remember how AI was supposed to take all the jobs and the unemployment rate would skyrocket in 2026? Obviously that didn’t happen this year.
One of my key economic cycle indicators for a recession — the number of residential construction jobs — still hasn’t broken, even today with elevated rates. It’s not looking great, but it hasn’t broken. Spending for AI data centers has boosted general construction workers’ data in this cycle, but the remodeling business has also held up ok in this cycle, which is why this chart hasn’t broken lower.
One data line the Fed likes
For a long time, I’ve believed that if the Fed really wants to target 2% wage growth, it needs wage growth to stay under 3% for a long time. If you target sub-3% wage growth and productivity is running at 1%, that is the pathway to 2% inflation. It just needs to stick there for at least 12-18 months to get the results the Fed wants, so wage growth at 3.1% is a victory the Fed will take right now.
One reason the Fed believes lower wage growth helps fight inflation is that they think Americans can’t keep spending to create more pricing power if wage growth is under 3%, and with headline inflation above 3%, real wages are negative now.
Conclusion
For 2026, I anticipated that the labor data would just get back to normal because last year we had a lot of drama with Godzilla tariffs and the government shutdown. Usually, the second year after a trade war, things get back to trend and this is what we are seeing now. The 3-month job average is above my break-even of 78,000 at 82,000, and the 6-month average is at 106,500. So we are back to trend job growth in my eyes. If you take all the drama out of the equation, this looks right.
If we were averaging 20,000 jobs per month, I would have a different take; or if we were averaging 140 per month on the 3-month average, I would say labor is beating estimates. But at 82,000 per month, we are looking just right here.
