Did the job market slip a gear?

Friday's report on the labor market in August was a big disappointment. It featured the weakest payroll gains of the year -- just 142,000 jobs were added. Expectations were high heading into the release given that we've seen the best pace of job creation since the 1990s. Over the last five months, the economy has added an average of 243,000 jobs per month.

The unemployment rate dropped back to 6.1 percent from 6.2 percent previously. A drop like that would normally be good news. But it's being driven by folks dropping out of the workforce. And that's bad.

But digging deeper into the details of the report, two things become clear. One, the weak payroll result is probably a fluke and will be revised higher. Two, the report provided more evidence that wages are about to grow at a faster rate.

Why a fluke? The headline payroll gain is the smallest we've seen since January's 113,000 result (which has since been revised to 144,000). Analysts are quick to look past the weak result since over the last few years, payroll gains have suffered an odd dip in August and September. According to Philippa Dunne at the Liscio Report, this has due to largely due to a data collection problem in the education sector near the start of the school year.

As a result, I expect the number to be moved higher towards 180,000 when it's all said and done.

The second and I believe more important takeaway is that the details of the report contained more evidence of a tightening in the job market that, if it continues, will support higher wage inflation in the months to come. This is the last piece of the puzzle for the recovery and is something middle-class families have been waiting a long time for.

The drop in the unemployment rate to date has been driven by the short-term unemployed finding work. What remains in the available pool of labor, as economists like to call job seekers, are those that have been out of work for awhile. This is a less easily assimilated group of workers, since many have seen skills atrophy or were trained in industries that are no longer in demand.

You can see this in other evidence as well. The number of people outside the workforce who say they are discouraged has dropped 12.5 percent in the past year. The share of the unemployed looking for a job fruitlessly for six months or more dropped to 31.2 percent in August from nearly 33 percent in July. And more and more workers are feeling confident enough to quit their jobs.

Given basic supply and demand dynamics, with the demand for good workers on the rise (given the growth in job postings, for instance) and with supply waning (given the jobs numbers from Friday) wages should move higher.

wages.png

Currently, wage inflation for production and nonsupervisory employees is growing at a 2.5 percent annual rate. A three percent rate would be considered more normal. At the current pace, we should see that within the next nine months.

If so, it'll be great news for regular families and in turn, will support the economy through higher retail sales, increased home prices, and less reliance on debt.

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.