August jobs numbers show the threat of spiraling inflation appears to be shrinking.
But, other data don’t square with that story. Most notably, the establishment survey showed the economy generating 187,000 jobs in August. The numbers from the prior two months were revised down, so that the three-month average stood at just 150k, but even this figure implies a considerably faster pace than most projections of potential labor force growth.
The only serious basis for Fed concern would be if wage growth seemed to accelerating. That is clearly not the case with the data in the Average Hourly Earnings series in the jobs report. Since this was the only wage series that had shown any evidence of acceleration, the Fed should be reasonably comfortable that accelerating wage growth will not reignite inflation.
The main channels through which rate hikes led to recessions in the past were a slowing of construction, especially residential construction, and a drop in net exports due to a rise in the value of the dollar. We have seen relatively little impact on either channel to date. The other factor was the rise in interest rates by other major central banks. Since all rates were going up more or less together, the higher rates in the U.S. did not have much impact.
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