US Employment Recovering

The month employment report for August was released yesterday. [For our readers who aren't as familiar with financial markets this report has been and continues to be the KEY monthly economic report to which the markets pay rapt attention.] Non-farm payrolls (farming jobs are excluded to volatility) increased by 144,000 jobs in August and payrolls for June and July were revised modestly upwards. The unemployment rate sank one-tenth of a percent to 5.4%. This is good news for the economy especially since August historically tends to be a weak hiring month. This report makes it highly likely that the Federal Reserve will nudge interest rates up another 25 basis points at the September 21 meeting. The market expects this and a failure to do would actually be a surprise and cause significant alarm in the markets- neither of which is desirable as far as the Fed is concerned.

The Anti-Bush campaign has brayed constantly about how the Bush recovery has created fewer jobs that previous recoveries. While this is true there are very good reasons why this is happening which the Democrats NEVER explain (assuming they understand it). I'll briefly go into two of the reasons.
One, productivity growth even into the recession has been fairly strong. Increases in worker productivity is generally very good since it allows growth while holding down inflation. However, higher productivity has a countervailing effect on employment growth -- more productive existing workers means less need to higher new workers.
Second, firms are still psychologically recovering from the Bubble and are extremely reluctant overall to make major hiring commitments and continue to be hawkish on expenses. (I work for a large bulge-bracket investment banking firm where, despite excellent profitability, hiring has been 'reluctant' and expenses monitored very carefully.) Essentially businesses are loath to hire unless they absolutely have to which means sooner or later there will be significant growth in hiring. It may come in Q4 or Q12005.