AI investment drives a rebound in U.S. manufacturing jobs, and the strong non-farm payroll adds leverage for a rate hike in September. Cleveland Fed President turns hawkish again.

U.S. job growth in August was unexpectedly strong, with manufacturing, construction, and other goods-producing sectors becoming significant driving forces behind the current employment expansion. Meanwhile, Cleveland Fed President Loretta Mester released a clear hawkish signal on Friday, stating that the current inflation situation indicates its time to take action and asserting that the existing monetary policy is still not restrictive enough for the economy. Under the combined effect of robust non-farm data and ongoing inflation pressures, the market has further increased its bets on a Fed rate hike in September. Mester remarked on Friday that both the latest economic data and the firsthand feedback she received from businesses in the Cleveland Fed district indicate that current monetary policy does not impose sufficient constraints on the economy. The information I am hearing now suggests that its time to take action. She specifically noted that she recently spoke with a leader of a manufacturing firm in Northeast Ohio, who directly informed her that the Fed should raise interest rates because many of the firm's inputs are experiencing double-digit price increases. This feedback further strengthened Mester's concerns about inflationary pressures. She is one of the most hawkish officials within the Fed recently. At the July policy meeting, the Fed decided to leave interest rates unchanged, and Mester was one of three policy makers who voted against this decision. The next Fed policy meeting will be held on September 15-16. Following the release of August's job report on Friday, which was significantly stronger than expected, market bets on a September rate hike heated up quickly, with investors now estimating the probability of a rate hike this month at just over 60%. The latest employment data further increases the policy pressure on the Fed. U.S. non-farm employment growth in August reached its largest increase in five months, while the unemployment rate remained steady at 4.1%, indicating that the labor market still shows strong resilience. Notably, the current employment growth cycle exhibits an unusual characteristic: job growth in manufacturing, construction, and other goods-producing sectors is outpacing that of the larger service sector, a shift that may be closely related to the massive AI infrastructure investments currently underway in the U.S. According to data from the Bureau of Labor Statistics (BLS), in the six months leading up to August, employment in the U.S. goods-producing sector grew by 0.6%, the largest increase of all comparable periods in 2023, and higher than the 0.4% increase in the service sector during the same period. Manufacturing employment improvements were particularly evident, with U.S. manufacturing adding a total of 43,000 jobs over the past three months, the strongest performance since the end of 2022. Citigroup economist Veronica Clark believes that the recent improvements in manufacturing and construction employment are largely linked to the large-scale push for AI infrastructure and data center construction in the U.S. As technology companies invest heavily in building data centers, the ongoing demand for factories, equipment, electrical infrastructure, and related manufactured products is steadily increasing and gradually feeding into the real economys employment market. Clark also pointed out that the tax provisions related to equipment and facilities investment in the Inflation Reduction Act passed last year have also further stimulated corporate capital expenditure. Specifically, the breadth of U.S. manufacturing employment growth has clearly improved. BLS data show that the employment breadth index, covering 72 manufacturing sectors, rose to its highest level in nearly four years in August. Manufacturing sectors including machinery, primary metals and metal products, computer and electronic products, as well as electrical equipment and appliance manufacturing all recorded robust job growth, indicating that this round of improvement in manufacturing employment is not concentrated in a few sectors. However, EY-Parthenon Chief Economist Gregory Daco cautioned that the recent rebound in manufacturing hiring should be viewed in light of the previously weak employment trends. Before this round of improvement, U.S. manufacturing employment had shown an overall declining trend for three consecutive years, suggesting that the current data may indicate a temporary turning point in manufacturing employment, with the potential for a sustained trend still uncertain. The White House quickly interpreted the strong employment report as evidence of the effectiveness of the economic policies of the Trump administration. National Economic Council Director Kevin Hassett noted that a closer examination of the internal structure of employment data shows that the policy is producing positive effects. Hassett pointed out that since Trump took office, approximately 90,000 jobs related to factory construction have been created. He believes that the construction of new factories not only creates current jobs but also has the potential to bring more long-term employment opportunities once these facilities begin production. The strong job market has also made the Fed's policy options in September more scrutinized. On one hand, AI data centers and manufacturing investments are driving economic activity and job growth; on the other hand, companies still face significant cost pressures, with inflation remaining above the Fed's 2% target. For Mester, these signs imply that the current level of monetary policy restriction may still be insufficient. If the economy's labor market continues to demonstrate resilience while cost pressures for companies fail to ease significantly, the Fed may need to consider further tightening monetary policy to prevent inflation from reigniting. As Fed officials are about to enter a quiet period prior to the September policy meeting, Mesters latest statement that its time to take action has become one of the clearest hawkish signals ahead of the meeting. Against the backdrop of stronger-than-expected August non-farm employment, a noticeable rebound in manufacturing hiring, and persistently high corporate input costs, market expectations for a Fed rate hike in September have heated up again, while the economic resilience driven by AI investment is emerging as a new variable influencing the Fed's policy judgments.