Bank of the West U.S. Outlook Report for August 7, 2015

The July jobs report came in about as we and the consensus expected.  There is nothing in the report that should dissuade the FOMC from their initial rate increase in September.  The net 215K nonfarm jobs created in July brings the year-to-date job creation total to 1.479 million, and the three-month average monthly gain to 235K.  With only one more employment report before the September FOMC meeting, it would probably take a sharp slowdown in job growth in August, perhaps well below +100K jobs or even negative job growth for the FOMC to delay their initial rate hike until December.  Thankfully, there is little to suggest that August job growth will suddenly stall.

The sharp slowdown in the growth of the Employment Cost Index for the second quarter created some doubt about the ability of U.S. wage growth to accelerate in the current economic environment and in-turn the timing of the first interest rate hike from the Fed, but those concerns were partly assuaged as average hourly earnings growth improved, up 0.2% on the month, and 2.1% year-on-year in July from 2.0% reported in June.  Average weekly earnings improved even more to 2.4% year-on-year up from 2.0% in June.  As the unemployment rate continues to drop, we expect further acceleration in average hourly earnings and average weekly earnings in the months ahead.

Perhaps the strongest signal of improving economic conditions comes from the ISM Non-manufacturing index, which hit its highest level of the expansion in July.  Service business new orders, employment and business activity all hit expansion highs, and even price gains strengthened.

With the July employment and earnings data behind us, the markets will turn their attention back to the inflation side of the Fed’s mandate.  Next week, we get the first reads on import prices and the producer price index for July. We forecast another month of weak price inflation as commodity and oil prices resumed their downward march. However, much of the weakness on price inflation is due to a strong dollar and weakness abroad, particularly in China, while service industry price trends appear to be firming on rising domestic demand.  Without further signs of deflation beyond commodities, it will be hard to justify delaying an initial Fed rate hike.  I continue to forecast a September Fed rate hike.

To find out more, check out this week’s US Outlook Report.