Last week, the Bureau of Labor Statistics (BLS) released its preliminary benchmark revision to payrolls for the year ending March 2026. This week’s “Three on Thursday” looks at what changed and what it means for the job market. Curious about the results? Click the link below to find out more.

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Implications: Existing home sales continued to struggle in August, as the recent jump in mortgage rates kept potential buyers on the sideline. Sales declined 2.0% in August and are now at the slowest pace in more than a year. Looking at the big picture, activity has been stuck in low gear since the end of the COVID pandemic, with the annual sales pace hovering around 4.000 million. That is roughly in line with the aftermath of the Great Financial Crisis, and well below the roughly 5.250 million annual pace pre-COVID (let alone the 6.500 million pace during COVID).  The main issue remains affordability which has taken a turn for the worse in the aftermath of the conflict with Iran, with higher energy costs having an upward impact on short-term inflation.  The result has been a rapid increase in 30-year mortgage rates, which are up 70 basis points since February and now sit around 6.8%. Buyers are also unlikely to get any help from the Federal Reserve due to recent strength in the US labor market and stubborn inflation putting rate hikes back on the table. However, there is some good news for buyers. Since the COVID pandemic, many existing homeowners have been reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This meant that potential buyers had to deal with limited options.  However, the existing home inventory has been improving recently and now sits at the highest level since the pandemic (though still well below pre-COVID levels). Meanwhile, the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) rose to 4.9 in August, the highest level since 2015 and nearing the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  Finally, though the median price of an existing home sits near a record high, it is up only 1.6% versus a year ago. Aggregate wage growth (hourly earnings plus hours worked) has been consistently outpacing median home price gains since early-2025, which gradually improves affordability. While many cross currents remain, the fundamentals for a modest improvement in home sales are starting to emerge.

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Implications: Producer prices rose in line with consensus expectations in August, as the Producer Price Index increased 0.4%.  More than half of the headline increase was due to a 4.2% increase in energy prices.  Excluding energy, producer prices rose a more modest 0.2%.  Looking at the details, both goods prices (+1.1%) and services prices (+0.1%) increased in August.  More than a third of the increase in goods prices was due to a 24.1% rise in diesel prices, reflecting a renewed rise in oil prices as Middle East hostilities continue.  Food prices (+0.1%) and other energy-related categories such as gasoline, jet fuel, and crude petroleum also rose. On the services side, prices rose a modest 0.1% overall, led by a 2.0% increase in truck freight transportation.  Further back in the supply chain, prices for unprocessed and processed intermediate goods rose 1.8% and 1.1%, respectively.  While the rise in processed intermediate goods prices was driven by energy, nearly 60% of the increase in unprocessed intermediate goods can be traced to nonfood materials excluding energy, which are industrial inputs that are neither food nor fuel, such as metal scrap and construction materials. Excluding food and energy, "core" producer prices rose a moderate 0.2% in August, while the twelve-month change was 4.6%, well above the 2.9% increase for the twelve months ending in August 2025.  Overall producer prices are up 5.4% in the past year, double the change from the twelve months ending in August 2025. The pickup in August prices is likely to put more pressure on the Fed to raise rates at next week’s meeting. Futures markets currently imply about a 70% chance of a hike. Part of that figure reflects the fact that the following meeting falls just before the mid-term elections, when policymakers will be careful to be perceived as independent of politics.  In the end, we believe policymakers should focus more on the money supply, which is up 5.4% in the past year versus the 6.0% trend prior to COVID when inflation remained low. We expect this monetary tightness will eventually bring inflation down once the conflict in the Middle East ends.  In other news this morning, initial claims for unemployment insurance declined 1,000 last week to 206,000, while continuing claims also declined 1,000 to 1.774 million.  These figures suggest job gains continue.

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Before Friday’s jobs report, it was roughly a toss-up in the financial markets whether the Fed would raise rates at the next meeting in mid-September.  Now, the odds favor a rate hike and it’s not hard to see why.

Nonfarm payrolls rose 162,000 in August, easily beating the consensus expected gain of 55,000 while payrolls were revised up 55,000 for the prior two months.  Remember the angst a month ago about the economy after July payrolls were originally reported down 23,000?  That negative number has been revised away and is now estimated at +21,000, instead.

But it’s not just payrolls that grew.  Total hours worked in the private sector rose 0.3% in August and are up 1.2% from a year ago.  In fact, in the past six months these hours are up at a 1.6% annual rate. This is important because it suggests the expansion in jobs should continue.  

Many investors remember the “olden days” back in the 1980s and 1990s when payrolls would expand year after year by about an average pace of 275,000 per month, so must be wondering why Friday’s report was perceived as so strong, particularly when the average monthly payroll gain has been only 50,000 in the past year.

But times have changed, particularly since January 2025.  As we have noted several times before – right or wrong, for better or for worse – the US has shifted from an extremely loose immigration policy to an extremely tight one.  And if net immigration (legal plus illegal) is roughly zero (or less!) while the native-born population ages, then the labor force is going to grow very slowly, meaning payroll growth will grow slowly, as well.

However, a rate hike later this month is far from a done deal or a slam dunk.  We get two inflation reports later this week, on consumer and producer prices, and if those come in more benign than the consensus expects, that may give Chairman Warsh enough ammunition to keep rates steady.

Another reason rates may hold steady is that wage growth has been tame.  Average hourly earnings rose 0.3% in August and are up only 3.1% from a year ago.  In the past six months, average hourly earnings are up at only a 2.6% annual rate.  If the Fed is targeting 2.0% inflation and productivity growth is in the 1.5 – 2.0% range then wage growth in the 3.5 – 4.0% range should be acceptable at the Fed, and yet recent wage growth is even slower than that!

This is one of those data sets that could help both supply-siders and Keynesians resist a rate hike.  For supply-siders it suggests AI is helping boost the demand for labor.  But increases in the demand for workers that reflect more production shouldn’t be inflationary.  That’s what also happened in the 1990s during the first internet boom and was a reason why then-Chairman Alan Greenspan resisted rate hikes. 

At the same time, the efficiencies created by AI may be holding down overall wage growth even though the Trump Administration’s immigration policies are limiting the labor pool.  Overheating this is not.

In turn, all of this is consistent with the monetarist view that policymakers need to focus more on the money supply, which has grown modestly the past few years and suggest that once we get past the initial energy shock related to the Iran War that inflation should subside anyhow, without further tightening.    

In the end, the Fed’s decision next week may come down to election timing.  The next meeting after September is scheduled one week prior to the mid-term elections, which means policymakers will be more eager than usual to avoid controversy.  And it would be hard to raise rates in October even if economic conditions warrant a hike by then, some might press for an earlier hike in September just to get it out of the way.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Implications:  The job market continues to defy fears of an AI-related job apocalypse. Nonfarm payrolls jumped 162,000 in August, beating even the most optimistic forecast by any Economics group on Bloomberg.  Job growth in prior months was revised higher by 55,000 as well, erasing the prior negative reading for July.  Meanwhile, civilian employment, an alternative yet volatile measure of jobs that includes small-business start-ups, rose 569,000, corroborating the strong headline number.  Big picture, it looks like the US labor market has strengthened so far this year, with average monthly growth of 80,000 in 2026 versus just 20,000 in 2025. While government employment posted one of the largest gains in August (+35,000), private-sector payrolls increased 127,000 as well, driven by broad increases. Leisure and hospitality (+62,000), healthcare and social assistance (+28,000), construction (+22,000), and manufacturing (+16,000) all contributed. Manufacturing and construction are worth highlighting because both categories have significantly improved in 2026, likely related to the buildout of data centers across the country. For added perspective, these two sectors alone have added 145,000 jobs in 2026.  Despite strong job growth in August, the unemployment rate remained unchanged at 4.1%. However, this was due to a 683,000 increase in the labor force (people who are either working or looking for work), another healthy signal. While data on growth in both jobs and the labor force were stronger than expected in August, keep in mind the underlying trend likely isn’t as strong as August data show. A combination of strict immigration enforcement and an aging population should mean slower growth in jobs without pushing up unemployment, which is what we’ve witnessed in the past year. The most important part of today’s report for the markets is that average hourly earnings rose 0.3% in August and are up 3.1% from a year ago.  All the strength in jobs and hours makes it more likely the Fed raises rates later this month unless next week’s CPI report comes in below the consensus expected 0.4%.

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Since 2008, the Federal Reserve (the “Fed”) has operated under an “abundant reserves” framework — a significant departure from its prior operating approach. While the Fed believes this framework has helped support financial markets and economic activity, it has also produced notable side effects. Last week, the Fed released its Q2 quarterly financial report, detailing the combined financial position of the 12 Federal Reserve Banks. Click the link below to find out more.

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Implications: Service sector expansion picked up steam in August, with the ISM Services Index rising to 55.4 from 54.1 in July.  Faster growth in business activity and new orders outweighed continued price pressure and soft hiring. Despite the conflict in the Middle East (including the downstream effect on energy prices) and the often-changing tariff landscape, service activity has expanded on the faster-end of post-pandemic levels in 2026, with the services index reading above 53.0 for nine consecutive months, the longest stretch since 2022.  Looking at the details, overall growth was broad in August, with twelve out of the eighteen major service industries reporting expansion, while five reported contraction, and one reported no change. The major measures of activity were mostly higher in August. The business activity index rose to 61.7 from 59.1, boosted in part by positive summer seasonality, and reaching the fastest pace since late 2022.  The new orders index also improved, registering 60.9 and reaching a three-year high.  Both forward-looking indices have shown expansion in each of the last twelve months. As caution surrounding supply-chain issues drag on, confidence in the near-term economic outlook remains soft. As a result, service sector hiring weakened once again, with the employment index remaining in contraction territory at 47.8. The services industry has struggled to consistently hire for about three years as the employment index has rarely registered above 50.0 (which would signal expansion) since 2023. Unfortunately, the highest reading of any index was once again the prices index, which rose to 72.6 in August, now the fifth time in the last six months the index has breached 70.0. Though the index remains elevated, it is well below the worst we saw during the COVID supply-chain disruptions, when the index reached the low 80s. While the ongoing conflict in Iran is expected to affect input prices in the short-term, we will continue to monitor the M2 money supply for signals of sustained movements in overall inflation. The money supply is up 5.4% in the past year versus the 6.0% trend prior to COVID when inflation remained low, suggesting that once the conflict in the Middle East is resolved, inflation may drop faster than most investors expect.  In other recent news, cars and light trucks were sold at a 16.8 million annual rate in August, up 2.6% from July, and up 4.3% from a year ago.

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Implications: The trade deficit widened substantially to $88.6 billion in July, the largest since the peak of tariff front-running in March 2025. The shift marks a break from the pattern of the past year, when the deficit held around $50 billion to $70 billion, albeit with considerable volatility.  The break is due to both a $6.6 billion decline in exports and a $10.8 billion rise in imports. Fortunately, a good chunk of the decline in exports came from nonmonetary gold – a category not included in GDP calculations – which should soften a little the impact to net exports on Q3 GDP.  The rise in imports once again reflects the surge in capital spending on computer processing – imports of computers and computer accessories alone rose $13.5 billion in July.  Year to date, these imports are up $164 billion compared to the same period in 2025. Adding semiconductors and telecommunications equipment brings the total increase to $228 billion. This dynamic caused imports of capital goods (which exclude autos) to rise 11.4% in July, the largest monthly gain in the category since 1993. We like to focus on total volume of trade, exports plus imports, as it shows the extent of business and consumer interaction across the border. That measure rose $4.2 billion in July and is up 10.4% in the past year. Over the past year, exports have risen 9.3% and imports are up 11.2%. Meanwhile, the landscape of global trade continues to evolve.  China, once the dominant exporter to the U.S., has slipped to a fourth place behind Mexico, Canada, and now Taiwan, with exports to the U.S. down 19.4% year to date compared to the same period last year. Accelerated demand for high tech equipment stands out in the data with imports from Taiwan up 60.0% over the same period moving them to third place.  Also in today’s report, the dollar value of U.S. petroleum exports once again exceeded imports, marking the 53rd consecutive month of America being a net exporter of petroleum products.  Keep in mind petroleum products include refined products like gasoline, diesel, and propane – all of which the U.S. exports in large volumes. When looking at crude oil alone however, the U.S. remains a net importer (although not nearly as much as in prior decades), largely due to domestic refinement capabilities.  In other recent news, initial jobless claims rose 2,000 last week to 206,000, while continuing claims rose 8,000 to 1.779 million. These figures suggest continued moderate payroll growth.

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Implications: Activity in the manufacturing sector continued expanding in August, although at a slightly slower pace than the previous month.  Despite the headline drop, the 54.6 reading for the ISM Manufacturing index marked the second-fastest pace since 2022.  That is now the eighth consecutive month of expansion, an encouraging development for an industry that has faced significant challenges in recent years.  While we remain cautious for the broader economy, it's clear that AI-related capital investment, the reshoring of production, and increased defense procurement are providing meaningful support to the sector.  Looking at the details of the report, fifteen out of the eighteen major manufacturing industries reported growth in August, with only two industries reporting contraction (Wood and Chemical Products), and one reporting no change. The major measures of activity moved mostly lower for the month, but all stand above 50, signaling growth. It is important to remember that until this year, new orders had been very weak going back to 2023, leaving manufacturers focused on order backlogs to keep production going.  So it’s good to see that along with the rise in new orders (currently sitting at 53.7), order backlogs have grown each month in 2026 after more than three straight years in contraction, currently sitting at 51.8.  The best news in the report is that the recent improvement in demand has finally enticed manufacturers to boost their hiring efforts, with the employment index staying in expansion territory for the second month in a row at 51.2 after nearly three straight years of contraction. Despite the employment index growing slightly slower than the 52.8 reading last month, the mix has improved, with more than double the industries reporting employment growth (seven) versus contraction (three), suggesting the rebound in hiring is extending beyond the strongest areas of the manufacturing sector. On the inflation front, the prices index looks to have stabilized, remaining unchanged from the previous month at 71.1. That is still significantly higher than the 59.0 level at the beginning of the year, but well below its recent peak of 84.6 back in April.  While we still believe there are problems elsewhere in the economy, certain industries are driving a manufacturing rebound that few expected just a year ago.  In other news this morning, construction spending declined 0.5% in July, as a large drop in homebuilding offset a rise in office construction. On the employment front, initial jobless claims fell two weeks ago by 4,000 to 203,000; continuing claims fell 8,000 to 1.778 million.

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Federal Reserve Chairman Kevin Warsh used his Jackson Hole speech last week to lay out what he thinks of monetary policy. Two things jumped off the pages of his speech.

First, “Fedspeak” may be making a comeback. Former Fed Chairman Alan Greenspan became famous for phrases like “irrational exuberance.”  One section of Warsh’s speech, titled “Preparing for Future Policy Conjunctures,” felt like a throwback. “Conjunctures,” really?  Greenspan would be proud.

Second, the narrative about Warsh is that he will get rid of forward guidance and make the Fed more circumspect.  Many thought that would give them less to talk about.  But compared to Jerome Powell, Warsh is much more focused on the monetary side of monetary policy.  Powell wouldn’t answer questions about abundant reserves or money supply.  His press conferences became all about interest rates and tariffs, while Warsh talks about commodity prices and M2.  

Warsh laid out seven principles.  The fifth of which was that “short-term interest rates are the predominant tool” for achieving the Federal Reserve’s mandate.

We completely disagree. If interest rates are the predominant tool, then why did inflation remain stable when Bernanke held rates near zero for seven years, but Powell got 9% inflation after just two years of zero rates? And why has inflation remained stubbornly high even after the rate hikes of recent years?

Interest rates used to signal monetary policy under the “scarce reserve” regime prior to 2008.  Banks traded federal funds, and changes in the supply of reserves helped move short-term rates. Today, banks are flooded with reserves and no longer trade them.  The federal funds rate is rate fixing by the Fed, with little market input. Money and rates are no longer connected. 

That is why Warsh’s sixth principle was so encouraging: “money matters.”  What a breath of fresh air for us Friedmanites who think this was the mistake Powell made, ignoring the 40%+ surge in M2 during the pandemic, causing the highest inflation in 40 years.

There is an interesting tension between his fifth and sixth principles. If money matters, why should short-term interest rates be viewed as the predominant tool of monetary policy? We would reverse the emphasis. Policy should be judged first and foremost by what is happening to the quantity of money, rather than simply where policymakers set an overnight rate. The Fed’s balance sheet, bank reserves, credit creation, and the Treasury General Account matter as well, particularly to the extent they influence the money supply.

Warsh also bashed “forward guidance.”  Forward guidance moves markets.  The Fed says, “this is what we are going to do with rates” and the market moves there.  Then analysts say, “the markets think the Fed should do this, or that.”  But the markets are just responding to the forward guidance.  Warsh calls this a “hall of mirrors” with the markets reflecting the Fed, and then the Fed reflecting the markets.  He is absolutely right.

However, if Warsh really does think that interest rates are the predominant tool of monetary policy, then forward guidance is part of that process.  So, we think he is being a little inconsistent.  Hopefully, he knows this and is just moving the Fed slowly but surely back to a money-focused institution.

He also said the Fed should take responsibility for 65 months of elevated inflation.  It took the Fed nearly 30 years to admit it caused the inflation of the 1970s.  To admit it in just 65 months is a miracle.  What a breath of fresh air in DC.

Finally, his comments leaned hawkish on rates. Markets price a 65% chance of a September hike. We agree and expect that probability to rise. We welcome this new Fed leadership, and a return to more transparent monetary policy.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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