The fact that employment growth remains robust even when GDP grows at a one percent rate is disconcerting, as it implies that labor productivity is continuing to weaken from already anemic rates. One potential explanation is that much of the weakness in GDP in recent quarters comes from manufacturing and mining, which are both capital intensive industries, so the impact on overall employment is limited.
In addition, businesses' preference for hiring over investment may reflect either perceptions of increased political risks in the short term, or fears that the pace of innovation is insufficient to boost long-term productivity growth.
The strong employment reports in the past two months increase the motivation for the Fed to increase rates in September, though in our view a post-election hike is still more likely.
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