Unemployment Rate Rises to 4.6%

Job losses in the manufacturing and construction sectors caused the US unemployment rate to tick up from 4.5% to 4.6% in the July BLS data. Wage growth was also largely contained. To economists slowing wage growth and a rise in unemployment may actually be good news. As the economy has cooled in the last few quarters the Fed has held the benchmark federal funds rate stable at 5.25% pointing to above target core inflation as its chief concern. A tight labor market, rising wages and slowing productivity led them to believe that a lack of slack in payrolls could lead to increased inflation as companies would offset their high labor costs with higher prices. A slowly rising unemployment rate and low wage growth could ease those concerns, giving the Fed more flexibility moving forward.

When the Fed meets next week I expect them to again hold rates steady at 5.25%. Bernanke will still list inflation as the chief threat to the economy. But somewhere in the back of his mind slowing growth, core inflation below 2% and a small uptick in unemployment are easing his inflation concerns. If all three trends continue, Fed reports by the end of the year should indicate a neutral stance between growth and inflation, though I do not expect a rate cut this year.