Disappointing wage data won’t help the Fed’s case for higher rates

A surge in wage growth during July was a welcome development after a particularly lacklustre start to the year. But this time, markets could be left disappointed. There were two additional workdays in August relative to July, and this typically means that average hourly earnings growth is noticeably lower. Of course, this is a statistical quirk that tells us nothing about the fundamental backdrop, which given high job-to-job flows and a jobs market near full employmenty, looks very strong. We still expect wage growth to gradually pick-up, but it's a slow-moving ship and we may struggle to see a figure above 3% this year.

Recent strength in jobs growth is a double-edged sword for the Fed. Whilst consistently large employment gains are no bad thing, it raises the possibility that the economy has more slack than previously thought. As the US nears full employment, logic says that job gains should slow. The Fed is well aware of this argument so even if payrolls corrects lower this month, policymakers are unlikely to bat an eyelid. It's also worth noting that this month's data will have been collected before Hurricane Harvey.

Another fall in July extended what has been a fairly remarkable decline in the unemployment rate so far this year. 350,000 people entered the labour force in July, with only 4k being left without a job. A fresh wave of individuals seeking work in August should keep the unemployment rate steady - although as always, it's worth saying that the household survey can be extremely choppy.