Don’t let the larger-than-expected gain in August payrolls fool you: The labor market is continuing to cool. The question is whether the moderation will last.
The U.S. economy added 187,000 jobs last month, marking the strongest pace of job gains for the summer after June and July figures were revised downward significantly. That brought the three-month average in job gains to 150,000, materially below the roughly 190,000 jobs added each month, on average, in the year that ended in February 2020, just before the pandemic hit.
The growth in payrolls was the strongest aspect of the August jobs report, which otherwise showed signs of cooling throughout. The unemployment rate rose to 3.8%, a statistically significant increase from July’s 3.5% level. Economists surveyed by FactSet had expected no change in the monthly figure.
The increase in the unemployment rate is considered good news, as it reflects a 0.2 percentage-point increase in the labor-force participation rate, or the share of people either employed or looking for work. It also signals a decline in labor-market tightness, which the Federal Reserve has long wanted to see as it works to tamp down inflation.
Wage growth also showed signs of moderating, a welcome sign as slower growth in wages is tied directly to slower services inflation. Average hourly earnings rose a less-than-expected 0.2% in August, compared with 0.4% in July, to reach a 4.3% annual pace, down from a 4.4% annual pace in July. Both August figures also came in 0.1 percentage point below forecasts.
The August payrolls report marks the third straight month of sub-200,000 job gains, a threshold that, until this summer, had been breached only once since the economy began to recover in May 2020 from the Covid downturn. The three-month rolling average in job gains, which economists prefer to the monthly tally because it smooths out month-to-month noise, now shows steady declines in job growth over the past year.
But in a win for the Federal Reserve, job growth hasn’t fallen too much. The three-month average remains well above the roughly 100,000 level economists say is needed each month to keep pace with population growth and keep the economy humming.
Overall, the August data were broadly in line with outcomes the Fed has long wanted to see as it works to slow the economy and tamp down inflation through higher interest rates: job gains that are plentiful but not unsustainable; wages that are healthy but not red-hot; and more people either working or looking for work.
Combined with data reported earlier in the week that showed a considerable decline in job openings, a proxy for labor demand, the latest jobs figures suggest the labor market is cooling but not collapsing. These and other recent economic reports likely will keep the Fed on track to hold interest rates steady at current levels of 5.25%-5.5% when policy makers next meet on Sept. 19-20.
Investors were pricing in just a 7% chance of a quarter-point interest-rate hike later this month after the data were released Friday morning, down from a 12% chance a day earlier, the CME FedWatch tool showed.
“For the Fed, this was a Goldilocks report,” wrote Tiffany Wilding, managing director and economist with Pimco. “Labor markets are cooling, but not falling off a cliff, and the slowing is likely to continue as the economy faces various headwinds in the second half of 2023.”
The central bank will receive another round of inflation data for August before policy makers meet to decide their next interest-rate move. A significant inflation surprise to the upside could still push officials to hike, but barring that, the Fed appears poised to keep rates steady for some time as it evaluates how efforts to tighten monetary policy so far are trickling through the economy.
“Monetary policy implications are relatively straightforward,”
BMO
strategist Ian Lyngen wrote after the August jobs data were released. “It just got a lot harder to justify a hike in Q4.”
Fed officials have penciled in one more quarter-point rise this year, but that could come during the November or December meetings, rather than in September, if officials feel the data merit it.
The question now is whether the labor market will continue to strike a balance, or accelerate or weaken further.
There is some reason to brace for further labor-market strength. The strong headline figure for August would have been considerably larger if not for the early-August bankruptcy of the less-than-truckload shipping company Yellow and the ongoing strikes in Hollywood. Together, those two events appeared to subtract roughly 54,000 positions for the month, a decline unlikely to be replicated in the future.
Some economists also highlighted before the report that due to seasonality calculations, initial job figures for the month of August have been consistently revised upward over the past decade. That could mean the latest figures are understating recent job growth—suggesting the clear moderation in June and July could be reversing.
The jump in the unemployment rate, too, could be fleeting. The rate saw a similar 0.3 percentage-point jump in the spring, between April and May, only to decline back to 3.5% two months later.
“We thought the labor market was softening, but that’s not necessarily what we saw in today’s numbers,” wrote Aaron Terrazas, chief economist with the job site Glassdoor. “With 187,000 jobs added, the economy may still be on a glide path to a soft landing, albeit a shakier path than expected.”
Other economists, however, highlighted aspects of the August report that suggest cracks are emerging in the labor market, which would mean the slowdown in hiring will continue.
The temporary-help services sector, for one, has now shed jobs in every month this year. The sector is sometimes considered a leading indicator for the broader market, because employers tend to shed temporary employees before moving on to broader job cuts.
The St. Louis Fed also released an analysis after the jobs data were reported that highlighted a decline in employment among what it calls “out-of-school youth” — 16- to 24-year-olds with no more than a high school degree—as a possible sign of broader labor market weakening. Because research shows that these vulnerable workers are often the first fired in economic slowdowns, a material decline in employment for this cohort could be indicative of larger trends taking hold.
August’s data suggested further declines for out-of-school youth, who have already seen employment fall since earlier this year, said William M. Rodgers III, vice president and director of the Institute for Economic Equity with the St. Louis Fed. That provides “fresh evidence that the economy’s overall slowing has taken root, and is adversely impacting the employment outcomes of the labor market’s most vulnerable contributors,” Rodgers wrote.
For now, the jobs news is broadly encouraging, and that is what Fed officials will take into their next policy meeting. Thereafter, more data will fill in the picture.
Write to Megan Cassella at [email protected]
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