Barclays has weighed in on the latest US employment data, suggesting that while the August nonfarm payrolls figure was robust on the surface, it may carry elements of exaggeration, with the odds of a September rate hike ticking up slightly.

Data released by the US Bureau of Labor Statistics on September 4th showed that nonfarm payrolls rose by 162,000 in August, significantly topping Barclays' forecast of 25,000 and the market consensus estimate of 55,000. Meanwhile, the previous two months' figures were revised upward by a combined 55,000, with the July reading revised from a loss of 23,000 to a gain of 21,000.

Following the release, the team led by Marc Giannoni at Barclays published a research note pointing out that part of the robust growth stems from a temporary rebound in the leisure and hospitality sector along with local education employment, rather than reflecting a sustained improvement in labor demand. As such, the monthly data may somewhat overstate the true strength of the jobs market.

The employment gains were largely concentrated in leisure and hospitality, alongside education and healthcare services, while the financial services sector saw a reduction in headcount. Barclays maintains its base-case forecast of a 25-basis-point rate hike in September, noting that the upcoming inflation data next week will be a critical variable. Although the bank projects both core CPI and core PCE to rise by roughly 0.23% month-over-month in August, given Fed Chair Warsh's emphasis on needing "sufficient and sufficiently rapid" confidence that inflation is moving toward target, Barclays believes a mild inflation reading would not be enough to rule out a September hike.

Payroll Growth Beats Expectations, But Statistical Distortions Are Evident

The August nonfarm payroll gain of 162,000 came in well above Barclays' projection of 25,000 and far exceeded the market consensus of 55,000. The three-month average pace of growth ticked up to 71,000 per month, still above Barclays' estimated "breakeven" pace, which sits near zero. However, the team believes the latest growth figure carries a degree of technical inflation.

Leisure and hospitality surged by 62,000 in a single month, following two consecutive monthly declines, making this a technical rebound. State and local education employment rose by 42,000 in August, partly retracing the sharp 58,000 drop seen in July. Government payrolls contributed 35,000 jobs overall, with local education being the primary driver. Private sector payrolls rose by 127,000, with services contributing 86,000, manufacturing adding 16,000, construction gaining 22,000, and mining up 3,000.

Barclays emphasizes that the three-month average growth of 75,000 per month in private nonfarm payrolls serves as a cleaner gauge of underlying labor demand, and recommends using this as the reference benchmark rather than the noisy single-month figure.

Birth-Death Model Adjustments Create Statistical Distortions

The Barclays report also notes that August payroll figures were influenced by the birth-death adjustment methodology. Compared with the same period in 2025, the drag from the birth-death adjustment this August was roughly 32,000 smaller, which helped boost the latest reading. Since the start of the year, the birth-death adjustments have exhibited considerable volatility.

However, looking at the three-month average from June through August, the adjustments for 2025 (-37,000) and 2026 (-28,000) are broadly comparable, meaning the monthly swings tend to offset over time. Barclays suggests this volatility may stem from a methodological change implemented by the BLS in January, which uses employment information from existing sample firms to extrapolate the hiring effect of new businesses. While the new procedure aims to reduce benchmark revisions, the monthly impact remains difficult to anticipate in practice.

Unemployment Rate Edges Higher, Labor Supply Still Volatile

The unemployment rate rose by 5 basis points in August, with the unrounded figure standing at 4.141% (versus 4.090% in July), though it remains at 4.1% once rounded. The uptick in the jobless rate stems from the fact that while household survey employment rose by 569,000, the labor force expanded by even more, at 683,000.

The labor force participation rate climbed 0.2 percentage points to 61.6%, driven largely by a sharp 0.8 percentage point jump in the 16-24 age bracket, with those aged 55 and over also contributing a 0.3 percentage point gain. However, the prime-age participation rate (25-54) held steady at 83.4%.

Barclays' analysis further indicates that the roughly 0.2 percentage point decline in participation since May is primarily due to lower participation willingness within age groups, rather than demographic aging. This aligns closely with the narrative of labor supply pressures arising from tightened mobility restrictions, and serves as a key basis for the team's view that the breakeven pace of job growth remains limited.

Labor Income Improves Notably, Purchasing Power Strengthens at the Margin

Barclays sees positive signals on the income front in the employment report. Average hourly earnings rose 0.27% month-over-month and 3.3% year-over-year, up from a 0.16% monthly gain in July. The average workweek ticked up 0.1 hours to 34.4 hours. Private sector payroll income grew by 0.67% month-over-month in aggregate, marking the fastest pace since January's 0.78% reading. The three-month annualized growth rate of payroll income reached 4.7%, up from 3.7% as of May this year, which still implies positive real income growth after accounting for inflation.

That said, Barclays' wage growth model assigns a lower weight to this month's AHE data, maintaining its estimate of underlying wage growth at 0.26% per month (3.1% annualized), which sits within the 3.0% to 3.5% range the Fed views as consistent with its 2% inflation target. This estimate incorporates the upside from the Q2 Employment Cost Index as well as data from the Atlanta Fed's wage growth tracker. The team also notes that the current 4.7% income growth pace is unsustainable, and expects real consumer spending growth to moderate to a 1.5% annualized quarterly pace in the second half of the year.

September Rate Hike Odds Tick Up, Inflation Data Next Key Hurdle

In summary, the report concludes that the August jobs data marginally strengthens the case for a 25-basis-point rate hike at the September FOMC meeting, consistent with Barclays' base-case expectation. The supporting arguments include job growth running persistently above the breakeven level, along with improvements in wages and hours that underpin labor income. The one soft spot is the modest rise in unemployment, which appears somewhat at odds with the strong pace of job creation.

Market attention now shifts to next week's inflation data. Barclays expects both core CPI and core PCE to record a 0.23% month-over-month increase in August. While that reading would be relatively benign, given Fed Chair Warsh's repeated emphasis on needing greater confidence that inflation is returning to target "clearly and at a sufficient pace," the team believes a 0.23% inflation print would not be enough to exclude the possibility of a September hike.

For fixed income and rates traders, a September rate hike remains the base case scenario, keeping short-end yields under pressure. The inflation data will serve as the final piece of the puzzle for this month.