How much of the US August non-farm payroll data was inflated?

Barclays believes that the strong August non-farm payroll data may have been exaggerated, and the probability of a rate hike in September has increased marginally.

According to Wall Street News , on September 4, the U.S. Bureau of Labor Statistics released data showing that non-farm payrolls increased by 162,000 in August, far exceeding Barclays' forecast of 25,000 and the market consensus expectation of 55,000. The data for the first two months were revised upward by a total of 55,000, with the July reading revised from -23,000 to +21,000.

According to TrendFocus, following the release of the employment data, Barclays' Marc Giannoni team published a research report pointing out that some of the strong growth stemmed from a temporary rebound in employment in the leisure and hospitality and local education sectors, rather than reflecting a continued improvement in labor demand. The report argued that this month's data somewhat exaggerated the actual strength of the labor market.

(Job growth was mainly concentrated in the leisure and hospitality industry, as well as education and healthcare services, while job losses occurred in the financial services industry.)

Barclays maintained its baseline forecast of a 25 basis point rate hike in September, noting that the inflation data to be released next week will be a key variable.

Although the bank expects both core CPI and core PCE to rise by about 0.23% month-on-month in August, given Fed Chairman Warsh's emphasis on the need for "sufficient and rapid" confidence that inflation is moving toward the target, Barclays believes that the modest inflation readings are not enough to rule out the possibility of a rate hike in September.

Job growth exceeded expectations, but statistical factors significantly influenced the outcome.

Nonfarm payrolls increased by 162,000 in August, higher than Barclays' forecast of 25,000 and significantly exceeding the market consensus expectation of 55,000. The three-month average growth rate rose to 71,000 per month, still higher than Barclays' estimated "break-even" growth rate (approximately 0).

However, the team believes that this growth is somewhat technically "inflated":

Leisure and hospitality : A jump of 62,000 in a single month, after two consecutive months of decline, this month's rebound is considered a technical one;State and local education employment : August saw a rebound of 42,000, which was a correction to the sharp decline in July (-58,000);Government departments : contributed 35,000 jobs in total, with local education departments being the main source.

Private sector employment increased by 127,000, with services contributing 86,000, manufacturing adding 16,000, construction adding 22,000, and mining adding 3,000.

Barclays emphasizes that the three-month average growth rate of private non-farm payrolls in August, at 75,000 per month, is a "cleaner" indicator of potential labor demand and suggests using it as a benchmark instead of noise-affected single-month data.

Statistical bias caused by adjustment factors in birth-mortality models

The Barclays report points out that the August non-farm payroll data was also affected by the birth-death adjustment method.

Compared to the same period in 2025, the drag on employment adjusted for births and deaths decreased by approximately 32,000 in August this year, contributing to the higher figure for this month.

(Since the beginning of the year, the adjustments for births and deaths have fluctuated significantly.)

However, looking at the average of the three months from June to August, the adjustment ranges for 2025 (-37,000) and 2026 (-28,000) are roughly the same, and the monthly fluctuations tend to cancel each other out over time.

Barclays believes this volatility may stem from a methodological adjustment implemented by the BLS in January, which uses employment information from existing sample firms to extrapolate the employment effects of new firms. While the new procedure aims to reduce the magnitude of benchmark revisions, the monthly impact is difficult to predict in practice.

The unemployment rate rose slightly, and the labor supply remained volatile.

The unemployment rate rose slightly by 5 basis points in August to 4.141% (up from 4.090% in July), but remained at 4.1% after rounding.

(The unemployment rate rose by 5 basis points in August, but is still rounded to 4.1%)

The reason for the rising unemployment rate is that, although the number of employed people in the household survey increased by 569,000, the size of the labor force expanded by 683,000, an even greater increase.

The labor force participation rate rose by 0.2 percentage points to 61.6%, mainly driven by a significant jump of 0.8 percentage points in the participation rate of the 16-24 age group, while the 55-year-old and above group also contributed 0.3 percentage points to the growth.

(In August, the labor force participation rate among the 16-24 age group increased significantly.)

However, the labor force participation rate for the most relevant prime age (25 to 54 years old) remained unchanged at 83.4%.

Barclays' analysis further points out that the approximately 0.2 percentage point decline in participation since May is mainly due to a decrease in willingness to participate within each age group, rather than an aging population structure.

This phenomenon is highly consistent with the narrative of labor supply pressure brought about by tightened movement restrictions, and is also an important basis for the team's judgment that "break-even employment growth is limited".

Labor income has improved significantly, and purchasing power has increased marginally.

Barclays believes the jobs report sent a positive signal on the income side:

Average hourly earnings (AHE) : up 0.27% month-over-month and 3.3% year-over-year, higher than the 0.16% month-over-month increase in July;Average working hours : increased by 0.1 hours to 34.4 hours;Private sector payrolls : Total payrolls increased by 0.67% month-over-month, the fastest growth rate since January (0.78%).The annualized growth rate of salary income over the past three months reached 4.7%, higher than the 3.7% as of May this year, which still means positive growth in real income after adjusting for inflation.

However, Barclays' wage growth model gives a low signal weight to this month's average hourly wage data, maintaining its assessment of bottom wage growth at 0.26% per month (3.1% annualized), which is within the 3.0% to 3.5% range that the Federal Reserve considers consistent with its 2% inflation target.

(Barclays model suggests that potential wage growth remains weak)

This estimate takes into account both the rise in the Q2 employment cost index and data from the Atlanta Fed's wage growth tracker. The team also points out that the current 4.7% income growth rate is unsustainable, and expects real consumer spending growth to slow to an annualized quarter-on-quarter rate of 1.5% in the second half of the year.

The probability of a September rate hike has increased marginally; inflation data will be the next key indicator.

Based on the above analysis, the report argues that the August employment data marginally strengthened the case for a 25 basis point rate hike by the FOMC in September, which is in line with Barclays' baseline expectations.

The rationale for raising interest rates is that job growth continues to exceed the break-even point, and improvements in wages and working hours are supporting labor income. The only weakness is the moderate rise in the unemployment rate, but this seems somewhat inconsistent with robust job creation.

Market attention has now shifted to next week's inflation data. Barclays expects both core CPI and core PCE to rise by 0.23% month-on-month in August.

Although the reading is generally moderate, the team believes that the 0.23% inflation figure is not enough to rule out a September rate hike, given that Federal Reserve Chairman Warsh has repeatedly emphasized the need for greater confidence that inflation will return to the target "clearly and at a sufficient pace. "

In summary, for fixed income and interest rate traders, a September rate hike remains the most likely baseline scenario, putting pressure on short-term interest rates; inflation data will be the final key piece of the puzzle this month.

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