US August Employment Rises Modestly

* August 2013 non-farm payroll employment rose by a smaller than expected 169,000 following a downwardly revised 104,000 increase in July.
* The separate household survey indicated that the August unemployment rate unexpectedly dropped to 7.3% from 7.4% in July with a sizeable decline in the labour force outpacing a weakening in household employment.
* Government employment rose 17,000 in August thereby resulting in a private-employment gain of 152,000

The increase in August 2013 payroll employment of 169,000 was down slightly from market expectations of a 180,000 increase. The August increase still managed to represent an improvement from July although this was abetted by a sizeable downward revision to the increase in that month to 104,000 from a previously estimated 162,000. The June gain was also revised downward to 172,000 from 188,000 previously. The separate household survey indicated an unexpected drop in the unemployment rate to 7.3% although this resulted from a sizeable 312,000 decline in the labour force outpacing a 115,000 drop in household employment.

Government employment surprised as well although on the upside by rising 17,000 in the month; however, this followed sizeable downward revisions the previous two months with the 1,000 rise previously reported for July being cut to a decline of 23,000, and the June decline deepened to -22,000 from -8,000. The downward revision to July government employment accounted for a little less than one-half of the overall downward revisions to July payrolls and accounted for about all of the June payroll revision.

Private-sector employment rose 152,000 in August following downwardly revised gains in both July and June to 127,000 and 194,000 from 161,000 and 196,000, respectively. Within the private-employment gain in August service-producing jobs contributed 134,000 new jobs following a 144,000 contribution in July (previously 157,000). The increase in August continues to be led by retail (44,000), education and health services (43,000), and professional and business services (23,000). Goods-producing industries rose 18,000, which offset the 17,000 drop in July (up 4,000 previously). The August increase mainly reflected a 14,000 rise in the manufacturing component with the mining and logging sector providing the remaining 4,000.

The overall workweek provided somewhat more encouraging news in rising to 34.5 hours from 34.4 hours in July thereby providing some indication that firms met demand by working employees longer rather than taking on new workers. The manufacturing workweek rose as well to 40.8 hours from 40.7 hours in July with overtime jumping to 3.4 hours from 3.2 hours last month. As a result of the rise in the workweek and to a lesser extent the gain in employment, the index of aggregate weekly hours rose a robust 0.4%, which more than offset the 0.1% decline in July.

The index of average hourly earnings, the principal wage measure in the report, rose 0.2% in the month. This contributed to the year-over-year rate in August rising to 2.2% from 2.0% in July.

The average gain in payroll employment during the last three months of 148,000 implied income growth that was sufficient to keep consumers spending although at a relatively modest pace. Looking ahead, some encouragement can be taken from the rise in the workweek that may be a prelude to firms opting to take on additional workers. The continued downward trend in jobless claims provides further reason to expect payroll gains to strengthen in September. Strengthening job growth and an easing in fiscal restraint are expected to contribute to growth returning to an above-potential rate on average for the second half of 2013. Assuming that the Federal Reserve takes a similar view of the recent trends, it will likely result in the central bank starting to reduce asset purchases during the fall. Our forecast assumes that the so called tapering begins in October with purchases fully wound down by the middle of 2014 although this is contingent on upcoming economic releases confirming greater strength is emerging.



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