The August U.S. monthly employment report, released on Sept. 2, missed expectations as jobs creation cooled significantly from prior months.
To reduce the month to month volatility in the jobs reports, we prefer to look at the rolling 6-month average. We think trends in the rolling average numbers are more important than the individual monthly reports.
As you can see in exhibit 1, the rolling 6-month average has settled at a rate significantly lower than in late 2014 and early 2015. Though the average current rate of jobs creation is near the low-end of the recovery range, these are not bad results in our view. We think these numbers are reflective of an economy that continues to grow slowly and generate well-paying jobs in health care and educational, as well as professional business services areas.
Still, this sluggish jobs growth should help keep a lid on inflationary pressure. We see diminishing inflationary pressure from the market-based inflation expectations, such as the 10-year TIPS breakeven spreads (see exhibit 2). The lack of inflationary pressure should also help keep long-term yields range-bound, though we do think they will drift higher from here.
Reflecting on the U.S. Federal Reserve’s (Fed) dual mandate of full employment and stable prices, as represented by the Fed’s 2% core inflation target, we see the slowdown in both jobs creation and inflationary pressure as giving the Fed further pause on raising interest rates. We weren’t surprised the Fed didn’t raise interest rates at its September 20-21 meeting.