AI investment drives US manufacturing employment recovery; strong non-farm payrolls add to September rate hike odds; Cleveland Fed President strikes a hawkish tone again

According to Zhitong Finance APP, U.S. employment growth in August was unexpectedly strong, with goods-producing industries such as manufacturing and construction playing a significant role in the current expansion of employment. Meanwhile, Cleveland Fed President Loretta Mester sent a clear hawkish signal again on Friday, stating that the current inflation situation indicates “it’s time to act” and that the existing monetary policy is still not restrictive enough for the economy. Under the combined effect of strong non-farm payroll data and persistent inflationary pressures, the market further increased its bets on a Fed rate hike in September.

On Friday, Mester noted that whether it’s the latest economic data or first-hand feedback from businesses within the Cleveland Fed’s jurisdiction, everything shows that current monetary policy has not imposed enough restraint on the economy. “The message I’m hearing now is that it’s time to act,” she said.

She specifically mentioned that she recently spoke with the head of a manufacturing company in Northeast Ohio, who directly told her that the Fed should raise interest rates because many of the company’s input costs are rising by double digits.

This feedback further reinforces Mester’s concerns about inflationary pressures. She is also one of the most hawkish officials within the Fed in recent times. At the July FOMC meeting, the Fed decided to keep rates unchanged, while Mester was one of three policymakers who dissented with this decision.

The next Fed policy meeting is scheduled for September 15–16. With the August jobs report released on Friday coming in much stronger than expected, market expectations for a rate hike in September have surged, and investors now see the probability of a Fed rate hike this month as slightly above 60%.

The latest employment data further adds to the policy pressure faced by the Fed. U.S. non-farm payrolls in August posted the largest gain in five months, and the unemployment rate stayed at 4.1%, indicating the labor market remains resilient.

Notably, this round of employment growth reveals an unusual feature: employment growth in manufacturing, construction, and other goods-producing industries is now outpacing that of the larger services sector. This shift may be closely related to massive AI infrastructure investments underway in the U.S.

According to the U.S. Bureau of Labor Statistics (BLS), goods-producing industries added 0.6% more jobs in the six months ended in August, the largest increase for any comparable period since 2023 and higher than the services sector’s 0.4% growth in the same period. Improvement in manufacturing jobs stands out in particular. Over the past three months, U.S. manufacturing added 43,000 jobs in total, the most robust performance since the end of 2022.

Citi economist Veronica Clark believes that improvement in manufacturing and construction employment is largely related to the massive build-out of AI infrastructure and data centers across the U.S. As tech companies invest heavily in constructing data centers, demand for plants, equipment, electrical infrastructure, and related manufactured products continues to increase, gradually driving job creation in the real economy.

Clark also noted that tax provisions related to equipment and facility investments in last year's "CHIPS and Science Act" further stimulated corporate capital expenditure. In terms of specific industries, the breadth of employment gains in U.S. manufacturing has also noticeably improved. BLS data show that in August, the employment diffusion index covering 72 manufacturing industries rose to its highest level in nearly four years.

Machinery, primary metals and fabricated metal products, computers and electronic products, as well as electrical equipment and home appliance manufacturers all recorded solid job growth, indicating that improvement in manufacturing employment is not limited to a few sectors.

However, EY-Parthenon Chief Economist Gregory Daco cautioned that the recent rebound in manufacturing hiring needs to be viewed in the context of previously weak employment trends. Prior to the current improvement, U.S. manufacturing employment had been declining overall for three consecutive years, so the current data are more likely to mark a temporary inflection rather than a sustained trend, which remains to be seen.

The White House was quick to cite the strong jobs report as evidence of the effectiveness of the Trump administration’s economic policies. National Economic Council Director Kevin Hassett commented that, when looking at the internal structure of the employment data, it is clear the policies are having a positive effect.

Hassett noted that since Trump took office, the number of people employed in factory construction-related work has increased by about 90,000. He believes that the construction of new factories not only creates current jobs but could lead to even more long-term job opportunities once those facilities come online.

The strong job market has also put increased attention on the Fed’s policy choices for September. On the one hand, AI data center and manufacturing investment are driving economic activity and job growth; on the other, businesses still face evident pressure from rising input costs, and inflation remains well above the Fed's 2% target.

For Mester, these signs suggest that the current stance of Fed monetary policy may still not be restrictive enough. If economic growth and the labor market remain resilient, while corporate cost pressures cannot be significantly tempered, the Fed may need to further tighten monetary policy to prevent inflation from spreading again.

As Fed officials enter the blackout period ahead of the September policy meeting, Mester's latest “it’s time to act” statement stands out as one of the clearest hawkish signals before the meeting. With August non-farm employment beating expectations, manufacturing hiring notably rebounding, and business input costs still elevated, market expectations for a September Fed rate hike have heated up again. Economic resilience driven by AI investment is becoming a new variable affecting the Fed’s policy judgment.