Hiring slowed this summer and unemployment rose in August, signs the labor market is cooling in the face of high interest rates.
U.S. employers added 187,000 jobs last month, while payrolls in June and July were revised down a combined 110,000, the Labor Department said Friday. Over those three months, 150,000 jobs were added monthly on average, down from a 238,000 average gain in March through May.
The report keeps the Federal Reserve on track to hold rates steady at its meeting this month, but won’t resolve a debate over whether to raise rates again in November or December. Other data show the broader economy remains strong, with consumer spending surging this summer and inflation easing.
The recent payroll increases are far below the roughly 400,000 average monthly gain in 2022. The unemployment rate was 3.8% last month, up from 3.5% in July—reflecting more Americans entering the labor market.
Workers’ average hourly earnings rose 4.3% in August from a year earlier, down from 4.4% in July, but well above the prepandemic pace.
Employers in transportation and warehousing cut staff last month after trucking company Yellow shut down. Employment in the entertainment industry fell as well, reflecting strike activity. Healthcare, leisure and hospitality, social assistance, and construction employers added jobs.
The jobs report is important because it is an indicator watched by Fed officials to determine whether they will need to raise borrowing costs again to slow the economy and ensure inflation keeps declining.
Some officials are uneasy about raising rates further because they expect past increases will continue to weaken the economy by making it more expensive and harder for companies and individuals to borrow. Others worry that strong economic growth could cause inflation to decline more slowly than anticipated if the Fed doesn’t respond by raising rates again.
In a speech last month, Fed Chair Jerome Powell kept the door open to lifting rates later this year if the economy doesn’t slow enough to convince policymakers that a recent decline in inflation will be sustainable.
Powell highlighted several ways in which supply and demand imbalances in the labor market are easing. Such rebalancing “remains incomplete,” he said. Powell said evidence of the labor market tightening could call for higher interest rates, but Friday’s report suggests the labor market is continuing to soften.
Falling demand for workers that loosens the labor market without triggering mass layoffs is the ideal outcome for the economy, said Luke Tilley, chief economist at Wilmington Trust Investment Advisors.
“We have a slower economy, and that is weighing on job growth, but it’s still pretty strong,” he said before the data release. “That is going to be the key to a soft landing because consumers aren’t going to cut back in a massive way and retrench if we continue to have net job growth.” A soft landing is an outcome in which the economy cools enough to control inflation without plunging into a recession.
Demand for workers moderating
Employment gains recently returned to a more sustainable pace. But which employers are adding workers varies markedly compared with broader gains when the economy was first emerging from the pandemic recession.
Healthcare, construction and social-services employers have hired this year at a relatively strong pace, as have industries that haven’t yet fully recovered the jobs lost during the pandemic shutdowns, including restaurants, child-care services and education. Meanwhile, factory head counts have stagnated, while employment at tech-heavy information companies is down this year.
Other evidence points to softening labor demand. In July, employers advertised fewer job openings, bringing vacancies to the lowest level since March 2021, though they remain higher than pre-pandemic levels. The share of workers who were new hires fell to its lowest rate since April 2020.
Mixed signals from wages
Wages have outpaced inflation in recent months, a boost to purchasing power that has helped keep economic growth stronger than expected at the start of the year.
This development is good for households, after two years of inflation eating away at living standards, as well as for the economy, because consumer outlays account for two-thirds of economic activity. But the rebound in inflation-adjusted wages might add to the central bank’s challenges. Powell indicated recently that getting inflation down will likely require a stretch of below-trend economic growth.
Wage growth is higher than the average rate before the pandemic and above the 3.5% rate that Fed officials and many economists think is compatible with 2% inflation.
“Wages have certainly slowed…but the degree of slowing we’ve seen is just achingly gradual,” said Jonathan Millar, senior U.S. economist at Barclays. “We’ve not seen enough slowing.”
Cooling wage growth from the unprecedented highs seen last year is evidence of weakening worker bargaining power as demand for labor comes more closely in line with supply. Other measures are flashing similar signs: The quits rate, which some economists see as a signal of wage pressures, fell back to the 2019 average in July, down from the record highs hit in 2021 and 2022.
Help still wanted
Other measures signal that the labor market remains unusually tight.
Unemployment is trending near a 50-year low, and the share of employed adults in their prime working years of 25 to 54 is the highest in more than 20 years. Labor-force participation rates for this group are above the pre-Covid level. But labor-force participation overall has yet to recover, largely because of retirements during the pandemic.
If job gains slow because there simply aren’t enough people to hire—and not because of falling demand for workers—wage and price pressures might stay elevated and complicate the soft-landing scenario.
Friday’s official U.S. jobs report for August gave traders and Federal Reserve policymakers just about everything they could have hoped for — reducing the market-implied likelihood of further 2023 rate hikes and producing a less deeply negative Treasury curve.
Though the headline number of job gains came in at a higher-than-expected 187,000, the report contained enough offsetting factors to support the case that the labor market is slowing by just enough to avoid tipping the economy into a contraction. Unemployment rose to 3.8% as labor-force participation picked up, growth in hourly wages was modest, and job gains in July and June were 110,000 lower than previously reported.
Financial markets initially reacted to the data with a rally in short-dated Treasurys that sent the policy-sensitive 2-year yield lower on the view that the Fed might be done with hiking rates. As the morning wore on though, Cleveland Fed President Loretta Mester threw a kink into the market’s thinking by saying inflation remains too high. Nonetheless, the Treasury yield curve continued to go less deeply negative on Friday, as investors stayed hopeful that the U.S. faces diminishing chances of an economic downturn.
“The combination of slower job growth, a rising labor-force participation rate, and weaker earnings growth makes this a near-perfect report from the Federal Reserve’s perspective,” said David Donabedian, chief investment officer of Atlanta-based CIBC Private Wealth US, which oversees $100.7 billion in assets.
Donabedian’s colleague, Gary Pzegeo, the firm’s Boston-based head of fixed income, added that “normalizing conditions in the labor market makes the Fed’s job easier and reduces the odds of another tightening this year,” and “the Treasury yield curve is steepening in response to the data, suggesting that the bond market expects the Fed is done.”
As of Friday morning, the policy-sensitive 2-year yield BX: TMUBMUSD02Y was up slightly at 4.887%, while the 10-year yield BX: TMUBMUSD10Y jumped 10.5 basis points to 4.195%. U.S. stocks DJIA SPX COMP turned mostly lower, though.
The 10-year yield currently sits well below the 2-year yield as a result of the Fed’s inflation battle and campaign of interest rate hikes since March 2022, which has pushed the Fed funds rate target to 5.25%-5.5%. That left the spread between the two yields at around minus 69 basis points on Friday.
The 2s/10s spread is widely watched because it has historically been one of the Treasury market’s most reliable indicators of impending recessions. It slopes upward, not downward, when there’s greater optimism about the economic outlook. Right now, the spread is slowly clawing back some of this year’s earlier pessimism, which had pushed it into triple-digit negative territory. And theoretically, the yield curve should continue to disinvest if investors factor in a possible shift in Fed policy.
Fed funds futures traders priced in a 93% chance of no action by the Fed in September, and a 60% or greater chance of the same for November and December, according to the CME FedWatch Tool.
Friday’s data “is decidedly positive,” said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, N.C. “However, when all is said and done, it will be the trajectory of inflation that will ultimately form the Fed’s rate decision— inflation remains sticky.”
At TradeStation, the Florida-based parent of online brokerage services firms, David Russell, global head of market strategy, said “The big takeaway from today’s number is that people are back in the labor force and looking for jobs.”
“Coronavirus distortions continue to fade,” Russell wrote in an email. “That’s visible from the jump in unemployment and participation. Other items like hourly wages and negative revisions show softening and argue for a Fed to pause.”
Stocks moved up on Friday following the latest jobs report, which showed the unemployment rate ticked higher in August.
Nonfarm payrolls climbed 187,000 last month, beating the consensus forecast of 170,000. The unemployment rate jumped to 3.8% from 3.5% the month before, and wage growth and hourly earnings slowed down.
Each of the three major stock indexes moved in the green after the report was published, with the Dow gaining 145 points before midday in New York.
So why exactly are investors cheering a higher unemployment rate?
In short, the data opens the door for the Federal Reserve to cut interest rate hikes sooner than later. This is good news for stocks because that would signal the end of policymakers' tightening campaign, which has been a headwind for equities for over a year.
Job openings are falling at a steady clip, and hiring and quitting rates are hovering near pre-pandemic levels. That, along with higher unemployment, may not sound like good news for everyday Americans, but as far as markets are concerned, the numbers give reason for optimism.
"This is the Fed's dream jobs report," Bill Adams, chief economist for Comerica Bank said. "An uptick in the unemployment rate and moderation of payroll and wage growth mean the Fed is very likely to hold their policy rate steady at the decision later this month."
A week ago in Jackson Hole, Fed chief Jerome Powell cautioned that more rate hikes were still on the table. But Friday's jobs data shows rate hikes seem to be having the intended impact, and that the Fed's next steps may not have to be so severe or restrictive.
"Unemployment jumping takes the pressure off the Fed," according to Bryce Doty, senior portfolio manager at Sit Investment Associates. "The yield curve will continue to un-invert with 2-year yields declining as investors build in a shift in Fed policy. All this despite a slightly higher number of jobs than expected, but downward revisions to previous months more than offset the positive absolute jobs number...the rise in the unemployment rate will steal the show."
Wall Street, for its part, remains conflicted on whether stocks will rebound out of a rocky August or stay muted through the rest of the year. Historical trends show that September is typically a bad month for equities, especially in the year before presidential elections.
"I just have a hard time believing that inflation is gonna come down, the Fed is going to be cutting rates, and growth will be just fine," JPMorgan's chief global stock strategist, Dubravko Lakos, said on August 24.
The latest US job data showed a labor market undergoing a controlled cooling, illustrated by solid hiring, slower earnings growth, and more people returning to the workforce.
Employers in August added 187,000 jobs in a broad-based advance, following downward revisions to payrolls in the prior two months, government figures showed Friday. Hundreds of thousands more joined the labor force, though a growing number were unable to find work right away.
Combined with wage growth running at the slowest pace since early last year, the data illustrate why Americans are a little less upbeat about the job market. While hiring and incomes are still firm enough to bolster consumer spending, job openings have retreated and layoffs are picking up.
The moderation gives the Federal Reserve room to pause interest-rate increases this month while keeping options open for another hike later in the year. Traders continued to see the Fed holding steady in September.
“The labor market was sprinting last year and now it’s getting closer to a marathon pace,” Nick Bunker, head of economic research at the Indeed Hiring Lab, said in a note. “A slowdown is welcome; it’s the only way to go the distance.”
Combined with inflation that’s now rising only modestly, the data support growing calls that the Fed can successfully tame price pressures without putting millions of people out of work.
“It’s not yet the 2019 labor market, but it’s darn close to it,” said Gregory Daco, chief economist at EY. “We’re not seeing any worrisome signs that would indicate a recession is around the corner.”
Job gains were probably less robust in the past year as well, according to preliminary estimates issued by the Bureau of Labor Statistics last week. Still, the figures point to a steady cooling rather than an outright collapse.
“The labor market overall is continuing to soar at an ideal cruising altitude — high enough to keep the unemployment rate low while creating more opportunities for workers to come in off the sidelines, but low enough so as not to cause a resurgence of inflation,” said ZipRecruiter Chief Economist Julia Pollak.
The unemployment rate climbed to 3.8%, the highest since early last year, though it largely reflected workers coming off the sidelines. The overall participation rate — the share of the population that is working or looking for work — rose for the first time since March to 62.8%, the highest since February 2020.
What Bloomberg Economics Says...
“Belying the upside surprise in the August payrolls print are weaknesses that suggest the should Fed pause its rate-hike cycle. Hourly wage growth slowed notably, labor-force participation increased — most notably for older workers and prime working-age women — and past prints were once again revised downward.”
— Stuart Paul and Eliza Winger
The August advance in payrolls was broad, led by gains in health care, leisure and hospitality, and construction. Manufacturing payrolls increased by the most since October and reflected more hiring of producers of machinery and fabricated metals.
Job growth would have been even stronger if not for strikes by Hollywood workers and the bankruptcy of trucking firm Yellow Corp. Looking ahead, a potential strike by the United Auto Workers and a possible government shutdown could also weigh on payrolls in the coming months.
Other firms are letting go of staff altogether. A measure of planned layoffs surged to a three-month high in August as companies like T-Mobile US Inc. and Charles Schwab Corp. announced fresh payroll cuts.