help wanted sign

Breaking down the latest labor report (and what it means for the Fed)

September 6, 2022
Michael ListBy Michael List, CFP®
Investment Management Officer

Labor seems to be a fitting topic to discuss today, as we just celebrated Labor Day and last week we saw a host of labor data. This was the last major employment data that will be released before the Federal Reserve’s (Fed’s) next rate decision in September — meaning markets and analysts will comb through the data for clues that may influence how much the Fed will raise rates.

Among the data releases were the monthly Bureau of Labor Statistics (BLS) Employment Situation Summary, the weekly BLS Job Openings and Labor Turnover Survey (JOLTS) and the monthly ADP Employment Report.

The Fed's balancing act

The Federal Reserve operates under a dual mandate of stable prices and maximum employment.  While voting members will look at numerous data and models, their primary focus tends to revolve around inflation (the personal consumption expenditure price index) and labor (BLS Employment Situation Summary, monthly payroll changes and unemployment).

The Fed uses these reports as they control monetary policy in search for the NAIRU (non-accelerating inflation rate of unemployment). The NAIRU is the theoretical level of maximum employment. Below this level of unemployment, inflation would be expected to rise. If the unemployment rate is above the NAIRU, then the economy is running below maximum employment and growth is lower than it should be.

Because NAIRU is theoretical, the Fed doesn’t know exactly what unemployment rate to target, so they use the reports above to evaluate current levels. This can cause the Fed to overshoot its target because both inflation and labor reports have a lag (they reveal the situation from the previous month). This risk for "overshooting" is compounded due to the fact that the Fed is “behind the curve” in raising rates, lately forcing an increase of 0.75% per meeting.

August jobs report: what we learned

As my colleague Jonathan indicated last week, odds of a 0.75% rate hike increased following the Jackson Hole Economic Symposium. The latest labor report increases that probability even further.

Employers added 315,000 jobs in August, while unemployment rose to 3.7% from 3.5%. If jobs are being added, what drove unemployment higher? More people are starting to look for jobs, therefore the workforce is growing larger. When we combine this report with the JOLTS, there are still nearly two job openings for every one unemployed individual.  This indicates the job market is still strong, while inflation is still too high with the personal consumption expenditure price index above 6%.

All of this likely means further rate hikes from the Fed, and more volatility in the near future. If you'd like to know more about how to protect your portfolio, contact an advisor today. Your financial success matters to us.

About the Author

Michael List, CFP®

Michael List is an Investment Management Officer within Security National's Wealth Management Division. Michael earned his Bachelor of Science in Business Administration with a concentration in Finance and Economics from Creighton University and holds the esteemed Certified Financial Planner, CFP® certification. List helps execute investment strategy, transactional execution and overall portfolio management. Having dedicated 14 years to the field of Wealth Management, Michael List brings a wealth of experience to his role, contributing to the success and growth of Security National Bank since 2008.