Jobs growth update: modest improvement in August.

Private sector job growth (the only jobs that really count) exceeded expectations in August (+127K vs +50K), but the overall picture remains the same: jobs growth over the past year or two has been very weak, but it has been improving over the course of the past year. The economy has regained its footing after the illegal-immigrant crackdown and the turmoil induced by Trump's tariffs and the war in Iran. 

To judge by today's reaction to the news, the bond market thinks that today's upside jobs surprise increases the chances of a Fed rate hike at the next FOMC meeting (September 16) from 50% to 60%. I disagree. If anything, I would argue that jobs growth remains so weak that a rate hike might pose a threat to the economy. Recall that two years ago the Fed began a series of six rate cuts which ended last December. That was likely the catalyst that arrested the decline in jobs growth which began in early 2022. Also recall that there is a "long and variable lag" between monetary policy changes and their impact on the economy.  

Nevertheless, jobs growth these days pales in importance compared to the rate of inflation. Expectations for next Friday's CPI report call for little or no change from last month's 3.4% y/y for total, and 2.4% for core—both currently running at only slightly more than Warsh's target. Meanwhile, the housing market continues to suffer from very slow sales growth, weak residential construction, elevated mortgage rates, and flat to falling home prices. These latter factors are likely to act as a continued headwind to the government's CPI calculation, as they have been doing for the past several years.

It's a good thing that Fed Chair Kevin Warsh is hyper-focused on reigning in inflation, but I don't think he will interpret these developments as a reason to raise rates any time soon. 

Chart #1

Chart #1 compares the level of private and public sector jobs. Of note, private sector jobs growth has been tepid in recent years, while public sector jobs—particularly at the federal level—have suffered a significant decline, thanks to Trump’s efforts to trim the federal workforce, which has shrunk by almost 2.7 million on his watch and hasn't been this small since 1966! 

Chart #2

Chart #2 compares the growth rate of private sector jobs, measured on a 6-month annualized and a year over year basis. (Doing this is essential to filter out the notorious “noise” in the monthly data.) It is becoming clear that the economy's vitality reached a low ebb in late 2025 and has since begun to recover.