This morning, the Bureau of Labor Statistics reported a strong jobs report for the month of August, with nonfarm payroll employment rose by nearly 1.4 million. Using the Bureau’s household survey data, the number of unemployed persons fell by 2.8 million and the unemployment rate dropped to 8.4 percent. This is the first time the unemployment rate has returned to single digits since the first surge of layoffs during the pandemic-induced shutdowns of early April. Even accounting for the nearly 250,000 temporary Census workers included in the August jobs report, that is still well over one million new jobs during the month and another incremental and positive sign of recovery.

While the number of newly employed was certainly welcome news this morning, a large gap remains between the total current number of employed and the number of employed in February before the pandemic took hold. After shedding 22 million jobs in March and April, the economy has only managed to add back half that number and the total employed is still approximately 11 million lower than in the February report. Of chief concern is the ultimate number of permanent job losses embedded in this difference.

This ongoing employment gap is of tremendous concern to the Federal Reserve which is mandated by Congress to promote maximum employment. Earlier this spring, they acted with unprecedented speed to ease financial conditions and support the financial “plumbing” of the economy. By all accounts they were successful in avoiding a market contagion similar to what shuttered financial markets during the Great Financial Crisis. Now their emphasis must turn to making progress helping the real economy heal in the form of continued employment gains.

The second mandate issued to the Federal Reserve by Congress is to maintain price stability, i.e. manage inflation. Over the last month or so, markets had begun to discount the Federal Reserve taking a novel approach to targeting inflation, with the key differentiator being they would allow inflation to run “hot” for prolonged periods in order to achieve an average target over a full business cycle. It is their hope that this new approach to managing inflation will also help stimulate economic growth and job creation above and beyond what their prior framework produced. Higher levels of growth and inflation would be “tolerated” in the name of getting the economy back to its full potential.

Financial markets took this new approach on average inflation targeting to heart in August. In a tidy example of financial symmetry, the S&P 500 surged 7 percent during the month while the 30-year Treasury Bond declined by 7 percent on the expectations for higher levels of both growth and inflation.

A final takeaway on the Federal Reserve’s new approach is that their maximum employment mandate appears to have achieved primacy in the setting of monetary policy. From a practical standpoint, this means we are likely to see accommodative policy from our central bank until we are well along the path of reversing this year’s job losses. While much uncertainty still exists, this path will likely be set by the interaction of medical developments, fiscal support and the durability of the recovery.

Takeaways for the Week:

Dow Jones shook up the constituents of its namesake Industrial Average this week, adding Salesforce.com, Amgen and Honeywell International to their index, replacing Exxon Mobil, Pfizer and Raytheon
The S&P 500 closed down 2.3 percent this week after posting weekly gains in the prior five weeks

Disclosures